EL AL ISRAEL AIRLINES LTD.

Transcription

1 Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding EL AL ISRAEL AIRLINES LTD. FINANCIAL STATEMENTS AS OF MARCH 31, 2017 (unaudited( CONTENTS SECTION B - DIRECTOR'S REPORT SECTION C - FINANCIAL STATEMENTS

2 Board of Directors Report of the State of the Corporation s Affairs For a period of three months ending on March 31, 2017: A. Explanations of the Board of Directors to the State of the Corporation s Business: a1. General and key data We are pleased to submit the Board of Directors Report of the State of the Corporation s Affairs for a period of three months ending on March 31, The Company serves as the leading air carrier of the State of Israel in most of the international routes operating to and from Israel. The Company s main operations involve the transport of passengers and cargo, including baggage and mail, on (mostly) scheduled flights and chartered flights between Israel and foreign countries. In addition, the Company is engaged in providing maintenance services at its hub airport, in the sale of duty-free products, and through affiliates in related activities, which primarily involve the production and supply of food for airlines and the management of a number of travel agencies overseas. For information regarding the Group s sectors of activity, see Note 8 of the Company s financial statements. The business environment in which the Company operates is the international and civil aviation and tourism industry to and from Israel, which is characterized by seasonality and the high level of competition, intensifying during periods of excess capacity and high sensitivity to the economic, political and security situation in the country and the world. Main data for a period of three months ending on March 31 ( millions): Change Operating revenues % Operating expenses (377) (362) 4% Gross profit % EBITDA (6%) Loss before income tax (39) (34) 16% Loss for the period (30) (21) 40% B-1

3 a2. Review of the developments in the business environment and operational metrics a2.1 Review of the business environment in which the Company operates For a period of three months ending on March 31: Traffic at Ben Gurion Airport: The following charts describe the developments of the traffic at Ben Gurion Airport, both passengers and cargo, divided by inbound and outbound tourisms, and regarding the cargo, divided by imports and exports. In the first quarter of 2017, the trend of significant growth in passenger traffic at Ben-Gurion Airport continued, while in the cargo sector there was a significant increase in the volume of imports and a slight increase in exports. Cargo and passenger traffic at Ben Gurion Airport: Thousands Change Thousands % Incoming tourists * Departing Israelis * Cargo import - tons ** Cargo export - tons ** 653 1, , % 14% 13% 2% * Source: the Central Bureau of Statistics ** Not including cargo in transit. Incoming tourism to Israel and departing israelies (in ): 1, ,008 1,152 1, Incoming tourists Departing Israelis *Source: the Central Bureau of Statistics B-2

4 Imports and exports of cargo by air to and from Israel (in of tons): Export - - Import * Source: Airport Authority Jet fuel: In the reported quarter, there was a trend of increase in jet fuel prices compared to the prices prevailing in the same quarter last year, as can be seen in the figure below. Regarding the development of the jet fuel prices after the date of the statement of financial position, see Part D below. Development of the average jet fuel and crude oil prices in the market: $/Barrel cent/gallon $/Barrel cent/gallon B-3

5 2a.2 The Company s operating metrics and market shares For a period of three months ending on March 31: Change Scheduled and charter passenger legs (paying passengers), in 1,135 1, % Revenue passenger - km flown (RPK) (scheduled) - in millions 4,651 4, % Seat - km available (ASK) (scheduled) - in millions 5,560 5, % (LOAD FACTOR (scheduled) in percentage 83.7% 80.6% 3.7% Total market share (scheduled and charter) - in percentage 32.8% 36.0% (9.0%) Flown cargo - in (11.8%) Revenue tons kilometers (RTK) - in millions (9.4%) Weighted flying hours (including leased equipment) - in * (1.1%) Average revenue per RPK - in cents** - in cents ** % Aircraft in operation at the end of the period - in units Average age of aircraft fleet owned at the end of the period - in years * Weighted flight hours in terms of the Boeing 767. ** Revenues of passengers and accompanying on scheduled flights, neutralizing changes in exchange rates. The data indicates a significant growth in the supply in the passenger leg flown by the Company and the revenue passenger-km flown (RPK), arising from an increase in the load factor which increased by 3.7% compared to the previous year. In addition, the data above indicates a decrease in the market share of the Company compared to the previous year, mainly in light of the substantial increase in traffic at Ben Gurion airport, while the Company is unable to increase its production capacity at similar rates. Operational metrics (in millions) 7, % 6,000 5,000 4,000 3,823 4,735 5,159 4,100 4,425 5,488 5,560 4,651 90% 3,000 2,000 1, % 79.5% 80.6% 83.7% 80% 0 70% RPK ASK LOAD FACTOR B-4

6 Traffic at Ben Gurion Airport and the market share of El Al and Sundor total traffic (mill. - per passeng. Leg) El Al & Sun D'or share in total traffic (%) % 35.4% 36.0% 32.8% 40% % % % % * Source: Airport Authority Legend: Passenger leg - the one-way flight voucher. RPK - revenue passenger kilometer - the number of paid passengers multiplied by distance flown. ASK - available seat kilometer - the number of seats offered for sale multiplied by distance flown. RTK - revenue ton kilometer - the weight in tons of the aircraft cargo for payment multiplied by distance flown. Passenger load factor (passenger occupancy) - passenger-km flown, expressed as a percentage of the available seats-km. Weighted flight hours - the weighted value of the planes: Boeing 767 = 1.00; Boeing 747 = 2.00; Boeing 777 = 1.6; Boeing 737 = 0.6. These weighting values were determined based on the estimated total expenditure of each aircraft type and are consistently used to calculate the weighted time of flight as an indicator of the volume of aviation activity. B-5

7 3a. Analysis of the business results of the Company Presented below are the statements of income of the Company, including the turnover rate and the rate of change compared to last year. Also presented are the explanations and the main trends affecting the Company's results in the reporting quarter compared to the previous year. For a period of three months ending on March 31: Change % of % of turnover turnover % Operating income 417, % 396, % 21, % Operating expenses (376,808) (90.2%) (362,098) (91.3%) (14,710) 4.1% Gross profit 40, % 34, % 6, % Sale expenses (46,427) (11.1%) (41,844) (10.6%) (4,583) 11.0% Management and general expenses (28,511) (6.8%) (22,097) (5.6%) (6,414) 29.0% Other income, net 0 0.0% % (317) Loss from ordinary activity (34,055) (8.2%) (29,237) (7.4%) (4,818) Net financing expenses (4,976) (4,855) (121) Company s share of the profits of associated companies, net of tax (293) Loss before income tax (38,769) (33,537) (5,232) Tax benefit 8,808 12,133 (3,325) Loss for the period (29,961) (21,404) (8,557) Operating income - the operating income increased in the reported period by about 21.2 million (5.3%) compared to the same period the previous year, with income from passengers increasing by 8.0%. The revenues were affected mainly by the increase in the number of passengers and the passenger-kilometers (RPK), mainly due to an increase in the occupancy rate and to some extent also due to an increase in the number of seat-kilometers (ASK). In addition, there was an increase of about 0.5% in the rate of return per passenger-kilometers, and cargo revenues decreased by 16.1% as a result of a decrease in the amount of tons-kilometers (RTK) flown and in ton-kilometers return. Operating expenses - the operating expenses increased in the reported period by about 14.7 million (4.1%) compared to the same period the previous year. The increase mainly resulted from an increase in the Company s salary expenses, as a result of a number of factors, primarily: bonuses to employees approved by the Company s competent organs in April 2017, and reflected as an expense in these financial statements, while bonuses to employees for 2015 were charged as an expense in the fourth quarter of 2015, the strengthening of the shekel compared to the dollar, and an increase in the salary of employees following an additional salary under the Company s salary agreements, including the agreements signed with the pilots, in December 2016 and February In addition, operating expenses were affected, inter alia, by an increase in jet fuel expenses as detailed below and by an increase in depreciation expenses, mainly due to a larger aircraft inventory during the first quarter of 2017 compared with the corresponding quarter last B-6

8 year and a change in the estimate of residual value of 777 aircraft. The increase in operating expenses is partly offset by a decrease in the volume of ad hoc leases of passenger and cargo aircraft compared to the corresponding quarter last year. It should be noted that in the current quarter, operating expenses were also affected, inter alia, by disruptions in the staffing of Company flights. However, compared to the same quarter the previous year, the impact was smaller. Jet fuel expenses: The Company's jet fuel expenses, including the impact of hedging, increased by 7.2 million (about 8.6%) compared to expenses in the same quarter last year as a result of an increase in jet fuel prices, which was partially offset by the impact of jet fuel hedging transactions and the decrease in flight hours. The table below reflects the impact of the jet fuel expenses on the Company s results, including the impact of hedging transactions (in millions): Difference millions Jet fuel expenses for the period (before the effect of hedging) Impact of jet fuel hedging transactions on profit and loss (1.0) 20.0 (21.0) Total jet fuel expenses (including the impact of hedging) For additional details regarding hedging the jet fuel prices, see Section b(3) below. For additional details for the impact of the derivatives on the financial statements, see Note 4 of the Condensed Financial Statements. Sales expenses - An increase of 11.0% was recorded in sale expenses, arising in part from an increase in salary expenses due to wage increases under the employment agreement and due to the strengthening of the shekel against the dollar, and partly from the larger distribution expenses, inter alia, due to the increase in the number of sales transactions. Management and general expenses - in the management and general expenses, there was an increase of 29% compared to the same quarter last year. Most of the increase is attributed to the increase in salary expenses, mainly as a result of the bonuses granted to employees and senior officers in respect of 2016, which were approved, as aforesaid, by the Company's authorized organs in April In addition, salary expenses were affected by the strengthening of the shekel against the dollar, as well as wage increases under the employment agreement. The increase in general and administrative expenses also resulted from an increase in expenses for professional services. Financing expenses - the net financing expenses amounted to about 5.0 million compared to about 4.9 million in the same quarter the previous year. B-7

9 Loss before tax - the loss before tax in the reported quarter amounted to about 38.8 million compared to loss before tax of about 33.5 million in the same quarter the previous year. Tax benefit - the tax benefit in the reported quarter amounted to about 8.8 million compared to about 12.1 million in the same quarter last year. The tax benefit in the corresponding quarter last year included 3.8 million, which resulted from a decrease in the corporate tax rate from 26.5% to 25%, as of January 1, Loss for the period - the loss after tax in the reported quarter amounted to about 30.0 million, constituting about 7.2% of the turnover, compared to loss after tax of 21.4 million, about 5.4% of the turnover. 4a. Sector Reporting Regarding the analysis of income and expenses based on sector of activity, see Note 8 of the Condensed Financial Statements. 5a. Seasonality The Group's activity is impacted by seasonality and intensifies in peak periods. Great movement of Israeli residents that go overseas takes place mainly in the summer months and holiday seasons, and large movement of tourists entering Israel takes place in the summer months and before Jewish or Christian holidays or vacations in the countries of origin. 6a. Cash flows Cash flows for a period of three months ending on March 31, 2017 compared to the same period the previous year are: January-March Change Cash flow arising from current operations 76,943 71,610 5,333 Cash flows used for investment activities (69,745) (56,847) (12,898) Cash flow arising from financing activity 13,465 9,994 3,471 Effect of changes in exchange rates on cash balances held in foreign currency 1, ,117 Increase in cash and cash equivalents 22,295 25,272 (2,977) Cash flow from current operations In the first quarter of 2017, the Company has a positive cash flow from current activities in the amount of about 76.9 million compared to positive cash flows from current activities in the amount of about 71.6 million in the same quarter last year. The increase in cash flow, despite the increase in the loss compared to last year, is mainly due to an increase in the Company's sales for future periods compared to last year (which is expressed in the balance of revenues in advance). In addition, cash flows from operating activities were also affected by the payment of part of March's salary, in the amount of about 14 million, paid at the end of the reporting period, compared to last year, in which this payment was made at the beginning of the following month. B-8

10 Development of cash flows from current operations for a period of three months ending on March 31, in the years ( millions): Cash flows for investment activities In the first quarter of 2017, the Company invested about 69.7 million, net, in investment activities. The investment in fixed assets and intangible assets amounted to a total of about 76.1 million (primarily advanced for 787 aircrafts and their engines and the purchase of replacement parts and accessories). Conversely, the Company generated cash as a result of the release of short-term deposits in the amount of about 6.3 million. In the first quarter of 2016, the Company invested about 56.8 million, net, in investment activities. The investment in fixed assets and intangible assets amounted to a total of about 68.5 million (primarily the completion of the payments for the purchase of aircrafts, advances for 787 aircrafts and their engines, and the purchase of parts and accessories). On the other hand, the Company received consideration from the sale of aircraft in the amount of 7.6 million, and exercised pledged deposits that were used as securities for hedging transactions of jet fuel in a total of about 4.1 million. Cash flows from financing activities In the first quarter of 2017, the Company generated cash flow in the amount of 13.5 million, net, from financing activities, which included receipt of loans in the amount of 33.5 million and an increase in short-term credit in the amount of 5.9 million, and on the other hand, the Company repaid loans in the amount of 25.9 million (see Note 5 of the condensed financial statements). In the first quarter of 2016, the Company generated cash flow about 10.0 million, net, from financing activities. The Company received long-term loans in the amount of million for the financing of the three aircraft, and on the other hand, repaid loans in the amount of million (inter alia, loans to finance advance payments for the purchase of these aircraft). B-9

11 7a. Financial state, cash balances and working capital of the Company Current assets 493, ,174 Current liabilities 887, ,225 Non-current Non-current assets 1,313,982 1,281,882 liabilities 674, ,780 Capital 245, ,051 Total 1,807,893 1,720,056 Total 1,807,893 1,720,056 The following are the main changes to the sections of assets, liabilities and capital as of March 31, 2016 compared to December 31, 2015: Current assets: The Company s current assets as of March 31, 2017 amounted to a total of about million, an increase of about 55.7 million compared to December 31, The increase arose mainly from an increase in the cash balances compared to the balance of cash at the end of 2016 and a seasonal increase in the customers section, which was offset in part by a decrease in the section of derivative financial instruments (see Note 4 of the condensed financial statements). Current liabilities: The Company s current liabilities as of March 31, 2017 amounted to a total of about million, an increase of about 83.9 million compared to December 31, The increase is due to a seasonal increase in the prepaid income from the sale of airline tickets, which was partially offset by a decrease in short-term credit and current maturities, mainly as a result of a refinancing agreement with a local bank, as stated in Note 5b(2) to the condensed financial statements. Working capital: As of March 31, 2017, the Company has a working capital deficit in the amount of about NIS million compared to deficit of about million as of December 31, It is noted that a material part of the deficit in the working capital does not reflect a short-term cash flow, as explained below. The current ratio of the Company as of March 31, 2017 increased to about 55.7% compared to 54.6% as of December 31, The working capital deficit as of March 31, 2017 includes two essential elements which are included under current liabilities of the Company and are characterized by a cyclical business activities, but the Company does not require sources of cash flow in the short term to repay them: Deferred income from sale of tickets and frequent flyer program, whose elimination will be done through a provision for future flight services, and a commitment to employees for vacation, which is expected to be paid over several years, but is classified as a short-term liability in accordance with GAAP. In addition, the current liabilities include loans to finance advance payments for the 787 aircraft, the source of which will be long-term financing to be received upon receipt of the aircraft. These amounts amount to approximately 497 million. B-10

12 Non-current assets: The non-current assets as of March 31, 2017 amounted to a total of about 1,314.0 million, an increase of about 32.1 million compared to the balance thereof as of December 31, 2016, mainly as a result of payment of advances for the purchase of Boeing 787 aircrafts, less the current depreciation. Non-current liabilities: The Company s current liabilities as of March 31, 2017 amounted to a total of about million, an increase of about 41.9 million compared to the balance as of December 31, The increase is mainly due to an increase in the balance of the loans (see above regarding a refinancing agreement), which was partially offset by a decrease in the liability for deferred taxes, mainly due to the pre-tax loss for the period. Equity: The total equity as of March 31, 2017 amounted to about 246 million. The increase of about 38.1 million compared to equity as of December 31, 2016 arose mainly from the loss for the period, and from the impact of the derivative instruments of the Company on the capital reserves, in the negative amount net of tax of about 9.2 million. Developments of the equity as of March 31 ( millions): Material loans and credit limits of the Company: In accordance with the guidelines of the Securities Authority in the matter of reportable credit event, the Company has determined that the materiality threshold for detail of material loans is 5% of the total consolidated balance sheet of the Company and 10% of the total loans of the corporation. In accordance with the criteria determined as stated above, in the reported period, there were no material changes in the material loans of the Company as set forth in Appendix A of the Board of Director s Report as of December 31, For additional details as to the loans of the Company and its compliance with the financial limitations and covenants, see Note 5 of the Condensed Financial Statements. B-11

13 b. Exposure to Market Risks and their Management: b(1) Description of the market risks to which the Company is exposed The following details the market risks to which the Company is exposed: Exposure to changes in the price of jet fuel - jet fuel prices changes, which is a key component of the Company's operating expenses, have a material impact on the Company s profitability. The Company believes that at the current level of activity, any change of one US cent per gallon of jet fuel price for a whole year now affects fuel expenses by approximately 2.6 million. The Company takes protection measures to reduce the exposure, as set forth in Section b(3) of the board of director s report below. Exposure to changes in interest rates - about 41% of long-term Company loans are at variable interest rates. Therefore, an increase in the LIBOR interest rate may impact the Company s profitability. In terms of the current loans, any increase of 1% in the LIBOR interest during an entire year will increase the financing expenses of the Company by about 4.1 million. Currency exposure - Most of the revenues and expenditures of the Company are the US dollar (the Company's functional currency) excluding shekel expenses, which are mainly salary expenses and payments to local suppliers in Israel. Accordingly, a change in the rate of the shekel against the dollar affects the Company's shekel expenses in dollar terms. The Company believes that at the current level of activity, every 1% addition in the exchange rate of the shekel against the dollar during an entire year, increases the Company's annual expenses by approximately 5.5 million. In addition, the Company also has currency exposure in respect of its balance sheet balances due to excess liabilities over shekel assets. Thus, a decrease of 10% in the exchange rate would have resulted in an expense of approximately 9.1 million, due to revaluation of the balances in the statement of financial position as stated. The Company takes protection measures to reduce the exposure, as set forth in Section b(5) of the board of director s report below. In addition, the Company has insignificant exposure to the Euro and other currencies. Exposure in the long-term loan framework - in accordance with the provisions of some of the loan agreements, the Company is required to comply with a minimum ratio between the market value of the aircrafts and the balance of the loans that are secured by the same aircrafts. Additionally, the Company is required to uphold a number of conditions, in the absence of which it may be required to demand immediate payment of the loans. The Company s exposure to market risks in this regard arises from the changes that occur to the market value of aircrafts in the world. For additional details, see Note 13c of the financial statements as of December 31, b(2) The Company s policy in the management of market risks, the parties responsible for their management, means of supervision and policy implementation Regarding the Company s policy in the management of market risks, the parties responsible for their management, means of supervision and policy implementation, see Note 18 of the financial statements as of December 31, B-12

14 b(3) Hedging jet fuel prices The Company performs financial transactions to protect against changes to the jet fuel prices, in accordance with the policy as explained in Note 18 of the Annual Financial Statements as of December 31, As of March 31, 2017, the Company had a number of engagements for the purpose of hedging jet fuel prices in a scope estimated at about 38% of the expected consumption in the next 12 months. In addition, the Company has hedged about 30% of the expected consumption for the period between April and December The net fair value of the total jet fuel hedging instruments as of March 31, 2017 is a positive amount of about 7.4 million. For details regarding changes that occur in the prices of jet fuel after the report date, see Section 2.d of the Board of Director s report below. The following is a sensitivity analysis of derivatives used to hedge the exposure to jet fuel: According to the principles of the model, grouping was performed of the jet fuel hedging instruments that respond similarly to market factors, since there was no material loss of information required for understanding the Company s exposure to the market risks as a result of the grouping. On January 5, 2009, a change of about 14% occurred in the prices of jet fuel, and therefore the following sensitivity analysis also includes a change of 15% in the prices of jet fuel. Increase by 15% Profit from the changes Increase by 10% Increase by 5% Fair value Decrease by 5% Loss from changes Decrease by 10% Decrease by 15% * $ / Gallon $ / Gallon $ / Gallon $ / Gallon $ / Gallon $ / Gallon $ / Gallon Jet fuel hedging transactions recognized as protection 21,708 14,156 6,933 7,382 (6,270) (12,215) (17,881) * Price of jet fuel in the Mediterranean as of March 31, 2017, based on which the fair value of the jet fuel hedging transactions of the Company is calculated. b(4) Hedging interest on loans As of the Report date, about 41% of the balance of the loans received by the Company are with variable interest and about 59% of the balance of the loans are with fixed interest for a period of up to about 12 years. The Company operates in accordance with the policy as explained in Note 18 of the Annual Financial Statements as of December 31, During 2016, the Company engaged in an interest hedging transaction in the scope of principal of about 106 million. B-13

15 The following is a sensitivity analysis of derivatives used to hedge the exposure to interest risk: Profit from the changes Increase by 10% in the rate of interest Increase by 100% in the rate of interest Increase by 5% in the rate of interest Fair value * Decrease by 5% in the rate of interest Loss from changes Decrease by 10% in the rate of interest Decrease by 100% in the rate of interest IRS transaction - designated for protection 4, ,104 (220) (440) (4,418) *The fair value is calculated based on LIBOR interest in the market as of March 31, 2017: LIBOR for three months -1.07%. b(5) Hedging exchange rates The Company performs transactions for hedging the currency exposure existing following changes to the shekel rate against the dollar, in accordance with the policy as explained in Note 18 of the Annual Financial Statements as of December 31, These transactions are recognized for accounting purposes as hedging transactions. The Company has a number of financial transactions that are intended to protect the Company from a decrease in the exchange rates of the dollar against the shekel by June The net fair value of the instruments as of March 31, 2017 is a positive amount of about 2.4 million. As of March 31, 2017, the Company is hedged at a scope of about 7% of the scope of anticipated exposure for the next 12 months. For details regarding the changes that occurred in the shekel-dollar exchange rate, see section 3.d of the Board of Director s report below. The following is a sensitivity analysis of derivatives used to hedge the exposure to currency risk: Loss from changes Increase by 10% In exchange rate Increase by 5% In exchange rate Fair value Profit from the changes Decrease by 5% In exchange rate Decrease by 10% In exchange rate NIS / $ Forward transactions Shekel-dollar intended for protection (3,555) (1,862) 2,373 2,058 4,346 B-14

16 C. Disclosure Provisions in connection with the Financial Reporting of the Corporation: c1. Disclosure as to Critical Accounting Estimates The implementation of the accounting principles by the management upon the preparation of the financial statements at times involves estimates, assumptions and assessments that impact the amounts of assets and liabilities and the business results reported within the financial statements. Some of the assumptions, estimates and assessments are critical to the financial state or results of activities reflected in the Group s financial statements, following the materiality of the matter, the complexity of the calculations or the degree of feasibility of the realization of the uncertain matters. For details regarding the material accounting estimates used by the Company, see Note 2c of the Financial Statements as of December 31, c2. Disclosure regarding valuation In accordance with Article 8b(i) of the Securities Regulations (Periodic and Immediate Reports), , the following are details regarding the valuation of the aircraft fleet that was prepared by the Company as of March 31, 2017 and March 31, 2016: Work performed The assessment of impairment of an investment of the Company's aircraft fleet (28 aircrafts owned in addition to 10 leased aircrafts) The assessment of impairment of an investment of the Company's aircraft fleet (29 aircrafts owned in addition to 10 leased aircrafts) Valuation date Relevant standards IAS 36, Impairment of Assets IAS 36, Impairment of Assets Fair value Working (Fair method value ) millions Discounted cash flow (DCF) Discounted cash flow (DCF) Value of use (Value in use) For El Al The recoverable amount - whichever is higher For El Al Reduced book cost 747 1,048 1, ,380 1, It is noted that in the periodic report for the first quarter of 2016, the Company estimated the recoverable amount at about 1,380 million, an amount that is 332 million more than the recoverable amount that was calculated for these financial statements, on the basis of the assumptions and estimates in the Company s possession at the time (May 2016). The decrease in the recoverable amount is mainly due to a decrease in the contribution of the aircraft fleet, due to a B-15

17 decrease in rates of return due to increased competition, an increase in the price of jet fuel and the strengthening of the shekel against the dollar, all in relation to the assumptions and information that existed at the time of the previous valuation. Furthermore, the strengthening of the shekel against the dollar even increased the Company's fixed expenses, which are charged to the activity, thereby causing an additional decline in the recoverable amount. In addition, since the recoverable amount is calculated on existing aircraft, some of which are expected to be out of service in the near future, a one-year advance on the time axis results in a decrease in the expected cash flow from these aircraft until they leave service, and consequently a structured decrease in the recoverable amount. For the full valuation, see Appendix A below. c3. Events after the report date of the financial position 1. On April 27, 2017, after the date of the statement of financial position, the Company declared a distribution of dividend in the amount of approximately 7.3 agorot per share (about 2 cents) for each ordinary share par value NIS 1 each. The total dividend amount is NIS 36.2 million ( 9.9 million). The ex-date is May 9, The dividend was actually paid on May 21, Regarding transactions with related and interested parties, see Note 9b to the condensed financial statements. 3. Regarding compensation to key management personnel, see Note 9c to the condensed financial statements. c4. The matters to which the accountants of the Company called attention in their opinion on the Financial Statements For details of the exposure to class actions against the Company and the Company s exposure to these class actions, please see Note 7 of the Condensed Financial Statements. D. Additional Information: Disclosure regarding changes in the economic environment, implications of the crisis in the capital markets and market risks and special events 1. The international aviation market is affected by the security and political situation, special events, such as the outbreak of epidemics and natural disasters around the world in general and in specific areas in particular, and the economic situation in Israel and the world. Below are changes that occurred in the prices of jet fuel and the exchange rate of the shekel from the end of the quarter and until the date near the publication of the Financial Report as of March 31, 2017: 2. As of the reporting date, the market price of the jet fuel (before fees and supplier margin's), weighted in accordance with the markets in which the Company purchases the jet fuel, was about cents per gallon, and as of the date near the approval of this Report, this price was about B-16

18 143.3 cents per gallon, which reflects a decrease of about 3%. It should be noted that the expense for the jet fuel constitutes about 22% of the Company s turnover, and therefore changes to the price may have a material impact on its financial results. In parallel, the fair value of the hedging instruments of jet fuel will be determined in accordance with the changes to prices that occurred since the date of the Report and from the conclusion of the settlement for some of the transactions. As of March 31, 2017, the Company had engagements for hedging the prices of jet fuel in a scope estimated at about 38% of the expected consumption for the upcoming 12 months, and 30% for the rest of After the date of the report, the Company performed additional financial transactions for protection against the increase in the price of jet fuel, in accordance with its hedging policy, and as of the date near the publication of this Report, it has hedged in a scope of about about 40% of the expected consumption for the period as of May 2017 and until April 2018 and 30% for the period from May 2018 and until December 2018, and 20% for January - March On the date near the publication of the financial statements, the dollar weakened compared to the shekel at a rate of about 1% compared to the date of the Report. The Company has hedging transactions for the shekel-dollar exchange rate (see Section b(5) of the Board of Director s Report above), the fair value of which may change in accordance with the changes to the exchange rates. It should be noted that the impact on the exchange rates on the business results of the next quarter will be determined in accordance with the exchange rates that actually occurred in the quarter generally and at its end (June 30, 2017). Mr. Amikam Cohen - Chairman of the Board of Directors David Mimon CEO May 23, 2017 B-17

19 Appendix A - Board of Directors Report of the State of the Corporation s Affairs for the period ending as of March 31, 2017 Under Article 8b of the Securities Regulations (Periodic and Immediate Reports), Following are details regarding the overall valuation of the Company's fleet of aircraft A. Introduction IAS 36 sets out the rules for accounting, presentation and disclosure required in the event of impairment of assets. The purpose of the standard is to prescribe procedures that the corporation must implement in order to ensure that its assets are not presented in amounts higher than recoverable amounts. An asset is presented in the financial statements at an amount higher than its recoverable amount, with its book value exceeding the amount that will be received from the value in use or realization of the asset. If the asset is impaired, IAS 36 requires a corporation to recognize loss from impairment. The document below presents the main points of the valuation performed by the management of (hereinafter El Al or the Company ) in order to determine whether the impairment of assets of the aircraft fleet (hereinafter: the Aircraft Fleet ) must be recognized based on IAS 36, in accordance with the directive of the Securities Authority. The document was prepared in accordance with a directive of the Israel Securities Authority pursuant to Regulation 8b of the Securities Regulations (Periodic and Immediate Reports), B. Details and identification of the group of assets The group of assets for which the test was carried out includes the 28 aircraft owned by the Company. In addition, the cash flows used in determining the recoverable amount of the aircraft fleet also includes the positive and negative cash flows in respect of 10 leased aircraft of the Company, which constitute an integral part of the Company's cash-generating unit (including lease payments in respect thereof). C. Effective date of the opinion May B-18

20 D. Appraiser In general, the valuation is performed by El Al's management. It should be noted that the weighted capital price of the Company (WACC), which constitutes part of the assumptions on the basis of which the valuation was made, was calculated by Giza, Singer, Even Ltd. E. The circumstances in respect of which the valuation was performed in accordance with IAS 36: The book value of the aircraft fleet is higher than the aggregate market value of the aircraft of which it is comprised, as appears in the price lists published by AVAC - The Aircraft Value Analysis Company and by AIRCLAIMS- Ascend worldwide. It should be noted that the use of the market value of the aircraft on the basis of AVAC and AIRCLAIMS price lists is common and accepted by airlines around the world and also by financing banking corporations and is also used by El Al in various agreements with banks. IAS 36 states, as stated, that a provision for impairment should be made when the carrying amount of the asset exceeds its recoverable amount. The recoverable amount is defined as the higher of the fair value or the value in use of the asset. Fair value is the amount that can be obtained from the sale of the asset in a good faith transaction between a willing buyer and a willing seller. The value in use of the asset is the present value of the estimated future cash flows expected to arise from the continuing use of the asset and its realization at the end of the useful life. The Company considers the market value of the properties as published by the AVAC and AIRCLAIMS companies as representing the fair value of these aircraft. As of the date of this valuation, the aggregate fair value of the Company s vehicle fleet, based on the price list as stated, amounted to about 747 million compared to the balance of the amortized book cost of the aircraft fleet (including headquarter assets) as of March 31, 2017, which amounts to a total of 936 million (a gap of 189 million). F. Valuation method: The valuation was performed on the basis of the cash flow capitalization method. According to this approach, estimates of expected cash flows for the Company from use the aircraft fleet were capitalized. The following are the main assumptions used in the valuation: The expected contribution from the aircraft fleet is based on the actual results of the first quarter of 2017 and the estimated results for the remainder of The projected results for 2017 are projected forward throughout the economic life of the aircraft fleet. B-19

21 The Company believes that based, inter alia, on an examination of estimates included in valuations in the past, this is the best estimate of the expected contribution from the aircraft fleet. The cash flow from the aircraft fleet of the Company is for a defined and final period of time, until the exit date from the planned service of the existing aircrafts. Due to the fact that the valuation of such use is performed for the Company s existing aircrafts, and in light of the fact that the replacement of part of the existing aircraft fleet of the Company with model 787 aircrafts is a material investment and out of the course of the Company s ordinary business, in a manner that will materially change the characteristics of the cash flows expected to arise from the vehicle fleet, including the composition of income and expenses, the cash flows expected to arise from the same future aircrafts were not taken into account, including the expected investment in their purchase and absorption. The useful life: the expected life of the Company s aircraft is determined based on the Company s long-term plans regarding the exit dates from service of the various aircraft, as follows: for the 777 fleet - about 6.5 years of activity on average, for the 747 fleet - about 1.5 years of activity on average, for the fleet - about 18 years of activity on average, for the fleet - about 9.5 years of activity on average, and for the 767 fleet - about 2.3 years of activity on average. The residual value at the end of the life span is calculated based on the forecasts by AVAC and AIRCLAIMS, and according to the Company's estimates, inter alia, depending on the condition of the planes and engines expected at the time of their exit, amounts to approximately 125 million (discounted values). Expected cash flow from operations: According to the assessment performed as stated, it was found that the net cash flow forecast for 2017 is expected to total 251 million (and after a theoretical tax flow million). This flow was calculated on the basis of the forecast of revenues from the aircraft fleet, less variable fees and expenses and less fixed cash flow expenses such as security, maintenance, operation and sales expenses, which can be allocated to the cost of operation of the aforementioned aircraft, and less the other operating expenses of the Company. Discount rate: In order to discount the expected cash flows from the operations of the aircraft fleet and capitalization of their retention values, a discount rate was used that reflects the operating risk of the aircraft fleet, based on the weighted average cost of capital of the Company. The discount rate was calculated by Giza-Singer Even Ltd., and the calculation is attached in this appendix. The discount rate was set at 6.3% after tax, which reflects a pre-tax discount rate of 8.7%. B-20

22 G. The value determined by the discounted cash flow method for the Company s aircraft fleet (in millions): Total discounted cash flow Total residual value Total Total value in use of the aircraft fleet based on discounted cash flow approach: 1,048 million The following is a sensitivity analysis of the value of use of the aforementioned aircraft fleet for the change in the discount rate, the change in the jet fuel price and for the change in the contribution of cash, which in the opinion of the Company are key factors that may change the value in use forecasts: 5.3% 5.8% 6.3% 6.8% 7.3% Discount rate after tax: Annual contribution after tax 201 1, ,051 1,026 1, ,099 1,073 1,048 1,024 1, ,148 1,120 1,094 1,070 1, ,196 1,168 1,141 1,115 1,090 B-21

23 H. Summary The table below presents the summary of the valuation calculation as of March 31, 2017 for the Company's aircraft fleet: Work performed Valuation date Relevant standards Working method millions Fair value (Fair value ) Value of use (Value in use) The recoverable amount - whichever is higher The assessment of impairment of the Company's aircraft fleet (28 aircrafts owned in addition to 10 leased aircrafts) IAS 36, Impairment of Assets Discounted cash flow (DCF) 747 1,048 1,048 Should a carrying amount be impaired? The balance of the depreciated cost of the aircraft fleet (including headquarters assets) per day March 31, 2017 The recoverable amount of the aircraft fleet as of March 31, 2017 millions Should a carrying amount be impaired? 936 1,048 No B-22

24 It is noted that in the periodic report for the first quarter of 2016, the Company estimated the recoverable amount at about 1,380 million, an amount that is 332 million more than the recoverable amount that was calculated for these financial statements, on the basis of the assumptions and estimates in the Company s possession at the time (May 2016). The decrease in the recoverable amount is mainly due to a decrease in the contribution of the aircraft fleet, due to a decrease in rates of return due to increased competition, an increase in the price of jet fuel and the strengthening of the shekel against the dollar, all in relation to the assumptions and information that existed at the time of the previous valuation. Furthermore, the strengthening of the shekel against the dollar even increased the Company's fixed expenses, which are charged to the activity, thereby causing an additional decline in the recoverable amount. In addition, since the recoverable amount is calculated on existing aircraft, some of which are expected to be out of service in the near future, a one-year advance on the time axis results in a decrease in the expected cash flow from these aircraft until they leave service, and consequently a structured decrease in the recoverable amount. This valuation is correct as at the date of the financial statements. The expected contribution from the aircraft fleet is based on the actual results of the first quarter of 2017 and the estimated results for the remainder of The projected results for 2017 are projected forward throughout the economic life of the aircraft fleet. If the aforementioned assumptions are not realized, the valuation may change and the Company may consequently be required to make a write-down due to impairment. B-23

25 Condensed Consolidated Financial Statements As of March 31, 2017 (Unaudited)

26 Condensed Consolidated Financial Statements As of March 31, 2017 (Unaudited) Table of Contents Page Review Report by Accountant C-2 Condensed Consolidated Financial Statements (Unaudited): Condensed Consolidated Statements of Financial Position C-3 - C-4 Condensed Consolidated Income Statements C-5 Condensed Consolidated Statements of Comprehensive Income C-6 Condensed Consolidated Statements of Changes to Equity C-7 - C-9 Condensed Consolidated Statements of Cash Flows C-10 - C-11 Notes to the Condensed Consolidated Financial Statements C-12 - C-22

27 Review Report of the Auditor to the Shareholders of Introduction We have reviewed the attached financial information of, the Company and subsidiaries (hereinafter: the Group"), including the condensed consolidated statement of financial position as of March 31, 2017, as well as the condensed consolidated income statements, comprehensive profit, changes to equity and cash flow for the period of three months ending on the same date. The board of directors and management are responsible for the preparation and presentation of financial information for this interim period, pursuant to International Accounting Standard IAS 34, Interim Financial Reporting, and are responsible for the preparation of financial information for this period pursuant to Section D of the Securities Regulations (Periodic and Immediate Reports), Our responsibility is to express a conclusion regarding the financial information for this interim period, based on our review. We have not reviewed the condensed interim financial information for consolidated companies whose assets as included in the consolidation constituted approx. 0.4% of the Company s total consolidated assets as of March 31, 2017, and whose income included in the consolidation constitutes about 1.2% of the total consolidated income for the period of three months ending on the same date. Additionally, we have been provided with reports by other accountants of the Company, the investment in which is approximately 15,020,000, as of March 31, 2017, and the share of the Group in its results is about 222,000, for a period of three months ending on the same date. The financial information for the condensed interim period of the same companies was reviewed by other accountants, whose review reports were provided to us, and our conclusion, inasmuch as it relates to the financial information in respect of the same companies, is based on the review reports prepared by the other accountants. Scope of the Review We conducted our review in accordance with Review Standard No. 1 of the Institute of Certified Public Accountants in Israel, "Review of Financial Information for Interim Periods Prepared by the Entity's Auditor." A review of interim financial information includes making inquiries, particularly with the people responsible for financial and accounting matters, and performing analytic and other review procedures. A review is significantly limited in scope in comparison to an audit conducted in accordance with generally accepted accounting standards in Israel, and therefore does not allow us to reach an assurance that we have become aware of all material issues which may have been identified in an audit. Accordingly, we do not express an audit opinion. Conclusion Based on our review and on the review reports provided by other auditors, nothing has come to our attention that would lead us to believe that the above financial information was not prepared, in all material respects, in accordance with IAS 34. In addition to the contents of the preceding paragraph, based on our review and on the review reports provided by other auditors, nothing has come to our attention which would lead us to believe that the above financial information does not fulfill, in all material respects, the disclosure requirements set forth in Section D of the Securities Regulations (Periodic and Immediate Reports), Without qualifying our opinion, we draw attention to Note 7 of the financial statements regarding regarding exposure to certification of a class action against the Company and the Company s exposure to these class actions. Brightman Almagor Zohar & Co. Accountants Member of Deloitte Touche Tohmatsu Limited Tel Aviv, May 23, 2017 C - 2