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 June 30, 2017 (unaudited( CONTENTS SECTION B DIRECTOR'S REPORT SECTION C FINANCIAL STATEMENTS

2 Free translation of the Hebrew Language Hebrew Wording Binding Board of Directors Report of the State of the Corporation s Affairs For periods of three and six months ending on June 30, 2017 A. Explanations of the Board of Directors as 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 periods of six and three months ending on June 30, 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, (primarily) on regular flights between Israel and foreign countries. In addition, the Company is engaged in providing transport and maintenance services at its hub airport, in the sale of dutyfree 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 9 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 fierce competition, intensifying during periods of excess capacity and high sensitivity to the economic, political and security situation in Israel and globally. Main data for the periods of six and three months ending on June 30 (USD millions): For the sixmonth period ending on June 30 For the threemonth period ending on June Change Change Operating revenues % % Operating expenses (810) (776) 4% (434) (414) 5% Gross profit (6%) (13%) EBITDA (24%) (26%) Profit (loss) before taxes on income (17) (54%) Profit (loss) for the period (14) (53%) B1

3 Free translation of the Hebrew Language Hebrew Wording Binding 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 the threemonth period ending on June 30: Traffic at Ben Gurion Airport: The following charts describe traffic developments at Ben Gurion Airport, both passengers and cargo, divided by inbound and outbound tourisms, and with respect to cargo, divided by imports and exports. In second quarter of 2017, the trend of significant growth in passenger traffic at Ben Gurion Airport continued, alongside a marked increase in import and export of air freight. Cargo and passenger traffic at Ben Gurion Airport: Thousands Change Thousands % Incoming tourists * Departing Israelis * Cargo import tons ** Cargo export tons ** 886 1, , % 15% 10% 7% * Source: the Central Bureau of Statistics ** Not including cargo in transit. Incoming tourism to Israel and outbound residents (in thousands): 2,400 1,230 1,306 1,537 1,769 2,000 1,600 1, Incoming tourists Departing Israelis *Source: the Central Bureau of Statistics B2

4 Free translation of the Hebrew Language Hebrew Wording Binding Imports and exports of air freight to and from Israel (thousands of tons): Export Import * Source: Airport Authority Jet fuel: In the reported quarter, there was a moderate increase in jet fuel prices as compared to the second quarter of 2016, as shown by the following graph. Regarding the development of jet fuel prices after the financial position statement date, see Part D. below. $/Barrel Development of average jet fuel and crude oil market prices: cent/gallon $/Barrel cent/gallon For the sixmonth period ending on June 30: Incoming tourists * Departing Israelis * Cargo import tons ** Cargo export tons ** Thousands 1,539 1,259 2,921 2, Change Thousands % % % % 2.9 4% B3

5 Free translation of the Hebrew Language Hebrew Wording Binding A2.2 The Company s operating metrics and market shares For the threemonth period ending on June 30: Change Passenger leg (scheduled and chartered) in thousands RPK (scheduled) in millions ASK (scheduled) in millions Load factor (scheduled) The Company's market share (scheduled and chartered) Flown cargo, in thousand tons Revenue tons kilometers (RTK) in millions Weighted flying hours (including leased equipment) in thousands * Average revenue per RPK in cents** Aircraft in operation end of period number of units Average age of owned fleet at the end of the period in years 1,485 5,552 6, % 29.5% ,450 5,627 6, % 34.2% % (1.3%) (2.8%) 1.5% (13.8%) (3.8%) (2.6%) (2.2%) 0.7% 0.7 * Weighted flight hours in terms of Boeing 767 ** Passenger and related revenue in regular flights net of exchange rate fluctuations The data points to an increase in the passenger segments flown by the Company; however, taking distance into account there was a decrease in the passengerkm (RPK) flown during the reported quarter. This stems from a different mix of short and long flights in compared to the flight mix in the second quarter of Load factor rose by 1.5% yearoveryear. In addition, the data points to a decrease in El Al's market share yearoveryear, primarily due to the significant growth in passenger traffic at Ben Gurion Airport, where El Al is unable to increase its production capacity to match said growth. Operating metrics (in million) 7,000 6,000 5,000 4,000 3,000 2,000 1, ,164 6,775 6,180 6,585 5,199 5,010 5,627 5, % 84.3% 83.1% 81.1% RPK ASK LOAD FACTOR 100% 90% 80% 70% B4

6 Free translation of the Hebrew Language Hebrew Wording Binding Traffic at Ben Gurion Airport and the market share of El Al and Sun Dor total traffic (mill. per passeng. Leg) El Al & Sun D'or share in total traffic (%) % 34.2% 31.9% 29.5% % 20% % % * Source: Airport Authority Legend: Passenger segment the oneway flight voucher. RPK revenue passenger kilometer the number of paid passengers multiplied by the airborne distance. ASK available seat kilometer the number of seats offered for sale multiplied by the airborne distance. RTK revenue ton kilometer which weights in tons the aircraft cargo for payment multiplied by airborne distance. Passenger load factor (passenger occupancy) passengerkm traveled, expressed as a percentage of the available seatskm. 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. For the sixmonth period ending on June 30: Change Passenger leg (scheduled and chartered) in thousands RPK (scheduled) in millions ASK (scheduled) in millions Load factor (scheduled) The Company's market share (scheduled and chartered) Flown cargo, in thousand tons Revenue tons kilometers (RTK) in millions Weighted flying hours (including leased equipment) in thousands * Average revenue per RPK in cents** 2,619 10,203 12, % 30.8% ,510 10,052 12, % 35.0% % 1.5% (1.0%) 2.5% (11.9%) (8.0%) (6.1%) (1.7%) 0.3% B5

7 Free translation of the Hebrew Language Hebrew Wording Binding A3. Analysis of the Company's business results Presented below are the Company's statements of income, including as a percentage from turnover 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 reported quarter compared to Q2/2016. For the threemonth period ending on June 30: USD thousands Change % of USD % of turnover thousands turnover USD thousands % Operating income 540, % 537, % 3, % Operating expenses (433,579) (80.2%) (413,653) (77.0%) (19,926) 4.8% Gross profit 107, % 123, % (16,546) (13.4%) Sale expenses (54,576) (10.1%) (50,898) (9.5%) (3,678) 7.2% Management and general expenses (25,804) (4.8%) (22,828) (4.2%) (2,976) 13.0% Other income, net % 1, % (991) Profit from ordinary activity 26, % 51, % (24,191) (47.3%) Financing expenses (4,649) (5,802) 1,153 Company s share of the profits of associated companies, net of tax (491) 1,642 (2,133) Profit before income tax 21,805 46,976 (25,171) Income tax (5,400) (11,965) 6,565 Profit for the period 16,405 35,011 (18,606) Operating income operating income in the reported period increased by USD 3.4 million (0.6%) compared to the second quarter of 2016, while revenue from passenger flights rose 1.1%. Said growth in income was recorded despite a decline in the volume of passengerkilometer (RPK) flown by the Company (due to a change in the flight mix), mainly owing to higher return per passengerkilometer. Revenue from cargo fell 2.5%, mainly due to the decline in the amount of ton kilometers (RTK) flown by the Company. Operating expenses operating expenses in the reported period rose by USD 19.9 million (4.8%) compared to the second quarter of 2016, primarily due to a USD 12.0 million increase in payroll expenses. The growth in payroll expenses is attributable to several factors, primarily the dollar's depreciation visàvis the NIS, employee salary increments pursuant to the Company's wage agreements, including those signed with the pilots, both in December 2016 and in February 2017, and the adjusted provision for tax assessments, as specified in note 7(d) of the condensed financial statements. Likewise, the Company's jet fuel expenses rose as detailed below. The increase in expenses was offset by the decrease in adhoc leasing expenses of passenger and cargo aircraft as compared to the second quarter of Jet fuel expenses: The Company's jet fuel expenses rose by USD 6.2 million (6.2%) compared to the second quarter of 2016, due to higher jet fuel prices. This impact was partially offset by the change in the results of jet fuel hedge transactions and the decrease in flight hours. B6

8 Free translation of the Hebrew Language Hebrew Wording Binding The table below presents the impact of the jet fuel expenses on the Company s results, including the impact of hedge transactions (in USD millions): Difference Jet fuel expenses for the period (before the effect of hedging) Impact of jet fuel hedging on the income statement )5.9( Total jet fuel expenses (including the impact of hedging) For additional details jet fuel hedging, see section b(3) below. For additional details on the impact of derivatives on the financial statements, see note 4 of the condensed financial statements. Selling expenses selling expenses rose by 7.2%, mainly due to the growth in the Company's advertising expenses, following the launch of new campaigns advertising the opening of a new destination (Miami) and the arrival of the new 787 aircraft, and due to the rise in payroll expenses, which was mainly affected by fluctuations in the dollar's exchange rate, as detailed above. Administrative and general expenses administrative and general expenses rose 13% yearoveryear, primarily due to the rise in payroll expenses, for the same reasons detailed above. Financing expenses net financing expenses amounted to USD 4.6 million compared to USD 5.8 million in the second quarter of This is attributable to the financing income recognized following the shekel's increase visàvis the dollar in Q2/2017 and its impact on current assets in Israeli currency on the Company's balance sheets (it is noted that the revaluation of NISdenominated balance sheet items, primarily liabilities relating to employee benefits that were recognized as an expense, is presented in payroll expenses, as part of the impact of exchange rate fluctuations on financing expenses). Pretax profit the pretax profit in the reported period totaled USD 21.8 million compared to a pretax profit of USD 47.0 million in the second quarter of 2016, mainly due to the increase in operating expenses, as detailed above. Income taxes income taxes in the reported quarter amounted to USD 5.4 million compared to USD 12.0 million in the second quarter of Profit for the period the posttax profit in the reported period amounted to USD 16.4 million, representing 3.0% of the turnover, compared to a postprofit of USD 35.0 million, which was 6.5% of turnover. B7

9 Free translation of the Hebrew Language Hebrew Wording Binding For the sixmonth period ending on June 30: USD thousands Change % of USD % of turnover thousands turnover USD thousands % Operating income 958, % 933, % 24, % Operating expenses (810,387) (84.5%) (775,751) (83.1%) (34,636) 4.5% Gross profit 148, % 158, % (10,050) (6.4%) Sale expenses (101,003) (10.5%) (92,742) (9.9%) (8,261) 8.9% Management and general expenses (54,315) (5.7%) (44,925) (4.8%) (9,390) 20.9% Other income, net % 1, % (1,308) Profit from ordinary activity (7,110) (0.7%) 21, % (29,009) Financing income (9,625) (10,657) 1,032 Company s share of the profits of associated companies, net of tax (229) 2,197 (2,426) Profit before income tax (16,964) 13,439 (30,403) Tax benefit (income tax) 3, ,240 Profit for the period (13,556) 13,607 (27,163) Operating income operating income in the reported period rose by USD 25 million (2.6%) compared to the second half of 2016, while revenue from passenger flights rose 3.9% and revenue from air cargo decreased by 9.8%. The growth in revenue from passengers is attributable to an increase in revenuepassengerkilometers (RPK) flown by the Company and higher return on passengerkilometer. The decline in revenue from cargo in the reported six months stems from the decline in both volume of tonkilometers (RTK) and return on tonkilometer. Operating expenses Operating expenses in the reported period rose by USD 34.6 million (4.5%) compared to the second half of The growth in operating expenses is attributable to the dollar's depreciation visàvis the NIS (as explained above for the second quarter's results), bonuses for 2016 that were approved in April 2017, and the increase in both jet fuel expenses and depreciation expenses (among others, due to the decommissioning of the 747 and 767 aircraft), which were partially offset by a decline in the adhoc leasing expenses of passenger and cargo aircraft as compared to the second half of The table below reflects the impact of the jet fuel expenses on the Company s results, including the impact of hedging transactions (in USD millions): Difference Jet fuel expenses for the period (before the effect of hedging) Impact of jet fuel hedging on the income statement ) 0.8( 26.1 )26.9( Total jet fuel expenses (including the impact of hedging) B8

10 Free translation of the Hebrew Language Hebrew Wording Binding Selling expenses selling expenses in the first half of 2017 rose by 8.9% yearoveryear, mainly due to the growth in payroll expenses as stated above and the launch of new advertising campaigns during the second quarter of Administrative and general expenses administrative and general expenses in the first half of 2017 rose 20.9% yearoveryear, primarily due to the rise in payroll expenses, the dollar's depreciation, expenses relating to bonuses for 2016, which were approved and paid in April 2017, and expenses on professional consulting. Financing expenses net financing expenses in the first half of 2017 amounted to USD 9.6 million compared to USD 10.7 million in the second half of 2016, mainly due to income from exchange rate differences following the shekel's increase visàvis the dollar compared to profit from the early repayment of a loan that was recognized in the first half of Tax benefit the tax benefit in the reported period amounted to USD 3.4 million, compared to a tax benefit of USD 168 thousands only in the first half of 2016 (tax expenses in the corresponding period decreased due to the revision in corporate tax rate which came into effect during the period). Loss for the period the pretax loss in the reported period amounted to USD 17.0 million (the posttax loss came at USD 13.6 million, representing 1.4% of the turnover), compared to a pretax profit of USD 13.4 million in the first half of 2016 (the posttax profit totaled USD 13.6 million, representing 1.5% of turnover). The difference is mainly due to higher operating expenses. A4. Sector reporting Regarding the analysis of income and expenses by operating segments, see note 9 of the condensed financial statements. A5. Seasonality The Group's activity is impacted by seasonality and intensifies during peak periods. A massive traffic of Israeli tourists traveling overseas is recorded in the summer months and the holiday seasons, while the biggest traffic of tourists to Israel is seen in the summer months and ahead of Jewish or Christian holidays or vacations in their countries of origin. B9

11 Free translation of the Hebrew Language Hebrew Wording Binding A6. Cash flows Cash flows for the threemonth period ending on June 30, 2017 compared to the same period of 2016 are: AprilJune Change USD thousands USD thousands Cash flow provided by operating activities, net 101, ,177 (5,952) Cash flows used in investment activities, net (99,954) (26,658) (73,296) Cash flows used in financing activities, net (10,234) (38,363) 28,129 Effect of exchange rate fluctuations on cash balances held in foreign currency 1,264 (464) 1,728 Increase (decrease) in cash and cash equivalents (7,699) 41,692 (49,391) Cash flow from operating activities In the second quarter of 2017, the Company had a positive cash flow from operating activities of USD million compared to positive cash flows from operating activities of USD million in the second quarter of The decrease in cash flows is mainly attributable to the decline in profit for the period, net of the effect of changes in asset and liability items, compared to the same quarter of In addition, cash flow from operating activities in Q2/2017 was affected by the payment of part of the bonus to employees and senior officers, while in Q2/2016 these bonuses were paid in full. Development in the cash flows from operating activities for the threemonth period ending on June 30, in the years (USD millions): B10

12 Free translation of the Hebrew Language Hebrew Wording Binding Cash flows for investment activities In the second quarter of 2017, the Company invested USD million, net, in investment activities. Investment in fixed assets and intangible assets amounted to USD 45.2 million (mainly advance payments for 787 aircrafts and their engines and the acquisition of spare parts and appliances, see note 3(c) of the condensed financial statements). In addition, a total of USD 54.9 million was invested in deposits. In the second quarter of 2016, the Company invested USD 26.7 million, net, in investment activities. The investment in fixed assets and intangible assets amounted to USD 24.6 million (mainly the acquisition of spare parts and appliances and advance payments for 787 aircrafts and their engines). In addition, the Company invested USD 9.8 million in shortterm deposits. On the other hand, the Company received proceeds in the amount of USD 7.7 million from the sale of a aircraft. Cash flows for financing activities: In the second quarter of 2017, the Company used net cash flows of USD 10.2 million for its financing activities, of which it repaid loans in the amount of USD 22.4 and paid dividend in the amount of USD 9.9 million. On the other hand, it received loans of USD 21.5 million to finance advance payments for the acquisition of aircraft (see note 5(b) of the condensed financial statements) and increased its shortterm credit USD 0.6 million. In the second quarter of 2016, the Company used a net cash flow of USD 38.4 million for its financing activities, of which the Company repaid loans totaling USD 23.1 and paid dividend in the amount of USD 15 million. Cash flows for the sixmonth period ending on June 30, 2017, compared to the same period of 2016: AprilJune Change USD thousands USD thousands Cash flow provided by operating activities, net 178, ,787 (619) Cash flows used in investment activities, net (169,699) (83,505) (86,194) Cash flows provided by (used in) financing activities, net 3,231 (28,369) 31,600 Effect of exchange rate fluctuations on cash balances held in foreign currency 2, ,845 Increase in cash and cash equivalents 14,596 66,964 (52,368) Cash flow from operating activities In the six months ending on June 30, 2017, the Company had a positive cash flow of USD million from operating activities compared to positive cash flows of USD million from operating activities in the same period of The change in cash flows from operating activities is immaterial. Cash flows for investment activities In the six months ending on June 30, 2017, the Company invested USD million, net, in investment activities. The investment in fixed assets and intangible assets amounted to USD million (primarily advance payment for the purchase of 787 aircrafts and their engines, and the purchase of spare parts and appliances). In addition, the Company invested USD 48.7 million in shortterm deposits. B11

13 Free translation of the Hebrew Language Hebrew Wording Binding In the six months ending on June 30, 2016, the Company invested USD 83.5 million, net, in investment activities. The investment in fixed assets and intangible assets amounted to USD 93.1 million (primarily the completion of payments for the purchase of aircrafts, advance payments for 787 aircrafts and their engines, and the purchase of spare parts and appliances). The Company also invested USD 5.7 million in shortterm deposits. On the other hand, the Company received proceeds from the sale of two aircrafts in the amount USD 15.3 million. Cash flows for financing activities: In the six months ending on June 30, 2017, the Company had a net cash flow of USD 3.2 million from financing activities. During this period, the Company repaid loans in the amount of USD 55.0 million which it took to finance advance payments for aircraft (see note 5(b) of the condensed financial statements), and increased its shortterm credit by USD 6.5 million. On the other hand, the Company repaid loans in the amount of USD 48.4 million and paid dividend in the amount of USD 9.9 million. In the six months ending on June 30, 2016, the Company used a net cash flow of USD 28.4 million for its financing activities. During this period, the Company paid loans in the amount of USD million and paid dividend in the amount of USD 15 million. On the other hand, the Company received longterm loans in the amount of USD 123 million to finance three aircrafts, which were received during the period. A7. The financial position, cash balances and working capital of the Company USD thousands USD thousands Current assets 548, ,174 Current liabilities 965, ,225 Noncurrent assets 1,320,937 1,281,882 Noncurrent liabilities 657, ,780 Capital 246, ,051 Total 1,869,307 1,720,056 Total 1,869,307 1,720,056 Below are the main changes in the Company's assets, liabilities and capital as of June 30, 2017 compared to December 31, 2016: Current assets: The Company s current assets as of June 30, 2017 amounted to USD million, an increase of USD million from their balance at December 31, This is due to the growth in the cash balance and shortterm deposits compared to yearend 2016 and a seasonal increase in trade receivables, which were partially offset by a decrease in financial derivatives (see note 4 of the condensed financial statements). Current liabilities: The Company s current liabilities as of June 30, 2017 amounted to USD million, up USD million from their balance at December 31, This increase is mainly attributable to a seasonal increase in unearned income from the sale of plane tickets and an increase in trade payables compared to December 31, It is also noted that the balance of shortterm loans was affected by an increase in the loans taken to finance advance payment for aircraft, which are expected to be repaid when the aircraft arrives, by means of new longterm loans, and offset by loans whose repayment was deferred due to an agreement with a local bank to refinance a loan, as detailed in note 5(b)(2) of the condensed financial statements. B12

14 Free translation of the Hebrew Language Hebrew Wording Binding Working capital: As of June 30, 2017, the Company had a working capital deficiency of NIS million compared to deficiency of USD million as of December 31, It is noted that a significant portion of the working capital deficiency does not reflect shortterm cash flow, as explained below. The Company's current ratio as of June 30, 2017 rose to 56.8% from a ratio of 54.6% as of December 31, The working capital deficiency as of June 30, 2017, has two main components which are included in the balance of current liabilities and are characterized by business cyclicality, however, the Company does not require cash flow sources in the shortterm to repay them: unearned income from the sale of airline tickets and frequent flyer miles, which will be recognized upon the provision of future flight services, and vacation pay liabilities, which is expected to be paid upon the retirement of employees, but is classified as a shortterm liability in accordance with GAAP. Current liabilities also include loans taken to finance advance payments for the 787 aircraft, which will be repaid with longterm loans upon the receipt of the aircraft. As of June 30, 2017, these liabilities amount to a total of USD 57 million. Noncurrent assets: Noncurrent assets as of June 30, 2017 amounted to USD 1, million, which is USD 39.1 million higher than their balance at December 31, 2016, mainly due to advance payments made for the purchase of Boeing 787 aircraft, less current depreciation. Noncurrent liabilities: The Company s noncurrent liabilities as of June 30, 2017 amounted to USD million, an increase of USD 24.5 million from their balance at December 31, 2016, mainly due to an increase in bank loans (among others, due to a loan to finance advance payments which was taken during the second quarter). Shareholders' equity Shareholders' equity of June 30, 2017 amounted to USD million. The USD 37.5 million decrease in equity compared to December 31, 2016 was primarily due to losses for the period and a dividend of USD 9.9 million, as well as the effect of hedging instruments on capital reserves, at a negative pretax amount of USD 18.0 million, which was partly offset by the remeasurement of defined benefit plans and currency translation difference of USD 4.0 million Development of equity as of June 30 (USD millions): B13

15 Free translation of the Hebrew Language Hebrew Wording Binding Material Company loans and credit lines: 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 restrictions and covenants, see note 5 of the condensed financial statements. B. Exposure to Market Risks and their Management B1. Qualitative report of exposure to market risks and their management B1. (1) General description of the market risks to which the Company is exposed Below are the market risks to which the Company is exposed: Exposure to changes in jet fuel prices jet fuel prices changes, which is a key component of the Company's operating expenses, have a material impact on profitability. The Company believes that at the current level of activity, any change in one US cent per gallon of jet fuel price for a whole year now affects fuel expenses by approximately USD 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 43% of longterm Company loans bear floating 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 during an entire year will increase the Company's financing expenses by approximately USD 2.6 million. The Company has entered into hedge transaction to reduce its exposure, as specified in section B(4) of the Board of Directors below. Currency exposure Most of the revenues and expenses of the Company are in US dollar (the Company's functional currency) excluding payroll expenses and payments to local suppliers in Israel, which are in NIS. 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, a 1% increase in the shekel visavis the dollar during an entire year will increase its annual expenses by USD 5.5 million. Likewise, the Company has a currency exposure in respect of balance sheet items, due to excess of liabilities over assets denominated in NIS. A 10% appreciation in the shekel visàvis the dollar would have resulted in expenses in the amount of USD 4.6 million, due to the revaluation of balances in the statement of financial position. As of the report date, there are no open currency hedge transactions. In addition, the Company has immaterial exposure to the euro and other currencies. Exposure in respect of longterm loans in accordance with the provisions of some of the loan agreements, the Company is required to meet 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 B14

16 Free translation of the Hebrew Language Hebrew Wording Binding fulfill several conditions, in the absence of which it may be required to immediately repay these loans. The Company s exposure to market risks in this regard results from changes in the market value of aircrafts globally. For additional details, see note 13d of the financial statements as of December 31, B(2) The Company s policy in the management of market risks, the management thereof, means of supervision and policy implementation Regarding the Company s policy in the management of market risks, the management thereof, means of supervision and policy implementation, see note 18 of the financial statements as of December 31, B (3) Hedging jet fuel prices The Company enters into financial transactions to hedge its exposure to changes in jet fuel prices, in accordance with the policy as explained in note 18 of the annual financial statements as of December 31, As of June 30, 2017, the Company had several jet fuel hedges estimated at 44% of the expected jet fuel consumption in the next 12 months. In addition, the Company hedged 30% of its expected consumption for the period between July and December 2018 and 10% for the first half of The net fair value of total jet fuel hedge instruments as of June 30, 2017 was () USD 1.6 million. For details regarding changes in jet fuel prices after the report date, see Section 2.d of the Board of Director s Report below. Presented below is a sensitivity analysis for derivatives used to hedge the Company's exposure to jet fuel prices: According to the principles of the model, jet fuel hedge instruments with similar sensitivity to market factors were grouped, since said grouping did not cause a material loss of the data required to understand the Company's market risk exposure. On January 5, 2009, jet fuel prices fluctuated by 14%; therefore, the following sensitivity analysis also takes into account a 15% change in jet fuel prices: 15% Increase Profit from increase 10% Increase 5% Increase Fair value 15% Decrease Loss from decrease 10% Decrease 5% Decrease * $/gallon $/gallon $/gallon $/gallon $/gallon $/gallon $/gallon Transactions recognized as jet fuel hedges 18,640 11,411 4,646 (1,620) (7,455) (13,085) (18,859) * Jet fuel prices in the Mediterranean Basin as of June 30, 2017, which are used to calculated the fair value of the Company's jet fuel hedges. B15

17 Free translation of the Hebrew Language Hebrew Wording Binding B (4) Hedging interest rates on loans As of the report date, 43% of the outstanding balance of Company loans has a floating interest rate and 57% of outstanding loans bear a fixed interest rate for a period of up to about 11 years. The Company operates in accordance with the policy detailed in note 18 of the annual financial statements as of December 31, During 2016, the Company entered into interest rate hedge transactions in the amount of USD 106 million. Presented below is a sensitivity analysis for derivatives used to hedge interest rate risks: 100% Increase in the interest rate Profit from increase 10% Increase in the interest rate 5% Increase in the interest rate Fair value 100% Decrease in the interest rate Loss from decrease 10% Decrease in the interest rate 5% Decrease in the interest rate IRS hedge transactions 2,904 1, (1,165) * Fair value was calculated using the LIBOR interest rate as of June 30, 2017: 3month LIBOR 1.21% B (5) Hedging exchange rates The Company performs transactions to hedge the currency exposure existing following changes in the shekel/dollar exchange rate, 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. As of June 30, 2017, there are no open interest rate hedge transactions. For details regarding the changes in the shekeldollar exchange rate see section 4.e of the Board of Director s Report below. B16

18 Free translation of the Hebrew Language Hebrew Wording Binding D. Disclosure in connection with the Financial Reporting of the Corporation: D1. 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 and assumptions that impact the amounts of assets and liabilities and the business results reported in the financial statements. Some of the assumptions and estimates are critical to the financial position or the operating results presented in the Group s financial statements, due to the materiality of the matter, the complexity of the calculations or the degree of likelihood for 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, D2. 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, Work performed Assessment for impairment of investment in the Company's aircraft fleet (28 owned aircrafts in addition to 10 leased aircrafts) Assessment for impairment of investment in the Company's aircraft fleet (29 owned aircrafts in addition to 10 leased aircrafts) Valuation date Relevant standards IAS 36, Impairment of Assets IAS 36, Impairment of Assets Working Fair method value USD millions Discounted cash flow (DCF) Discounted cash flow (DCF) Value in use For El Al The recoverable amount whichever is higher For El Al Depreciated book value 747 1,048 1, ,380 1, It is noted that in the periodic report for the first quarter of 2016, the Company assessed the recoverable amount at USD 1,380 million, higher by USD 332 million than the recoverable amount calculated for the first quarter of 2017, based on the assumptions and estimates made by management at that time (May 2016). The decline in the recoverable amount is mainly attributable to the decline in the contribution of the aircraft B17

19 Free translation of the Hebrew Language Hebrew Wording Binding fleet, due to lower rates of return as a result of fierce competition, higher jet fuel prices and an increase in the Company's operating expenses, caused by the shekel's appreciation visavis the dollar, all in relation to the assumptions and information available to the Company when the previous assessment was made. Likewise, since the recoverable amount is calculated for aircrafts, some of which are scheduled to be decommissioned in the near future, looking one year forward points to a decline in the estimated cash flows from these aircrafts until they are retired from service, and as a result to a structured decrease in the recoverable amount. For the full valuation, see the quarterly report as of March 31, 2017, published on May 24, 2017 (reference no.: ). Since the date of publication of the full valuation of the aircraft fleet which was attached to the Board of Director s Report for the first quarter of 2017, and until the date of publication of this report, no changes occurred that might, in the Company s assessment, change the conclusion in the valuation that no impairment provision should be made in respect of the aircrafts in the valuation. See note 3a of the condensed financial statements. D3. Matters to which the Company's auditors called attention in their opinion on the Financial Statements For details of exposure to the certification of class actions against the Company and the Company s exposure to these class actions, please see Note 7 of the condensed financial statements. B18

20 Free translation of the Hebrew Language Hebrew Wording Binding D. Additional information: Disclosure regarding changes in the economic environment, repercussions of the crisis in the capital markets and market risks and special events 1. The global aviation market is affected by the security and political situation, special events, such as the outbreak of epidemics and natural disasters worldwide in general and in specific areas in particular, and the economic situation in Israel and globally. Below are changes in the prices of jet fuel, the interest rate and the shekel's exchange rate from the end of the quarter and until close to the publication of the Financial Report as of June 30, 2017: 2. As of the reporting date, the market price of jet fuel (before fees and supplier margins), weighted according to the markets in which the Company purchases jet fuel, was cents per gallon, while as of the date close the approval of this Report, the price was cents per gallon, a 9% increase. It is noted that jet fuelrelated expenses constitute approx. 20% of the Company s turnover, and therefore changes in jet fuel prices may have a material impact on its financial results. The fair value of the jet fuel hedging instruments is determined based on the change in prices since the date of the Report and the conclusion of transaction settlements. As of June 30, 2017, the Company had jet fuel hedge transactions estimated at 44% of the expected jet fuel consumption for the period between July 2017 and June 2018, 30% of the consumption for the remaining months of 2018 and 10% for the first quarter of After the date of the Report, the Company entered into additional transactions to hedge against an increase in jet fuel prices, in line with its hedging policy, and as of the date close to the publication of this Report, these hedges cover 41% of the expected jet fuel consumption for the next 12 months, 30% for the remaining months of 2018 and 10% for the first quarter of Subsequent to the date of the Report, the Company entered into interest rate hedges for additional loans, following approval of the board of directors' risk management committee, so that total interest rate hedges (including fixedinterest loans) as of the date close to the publication of this report covered 73% of outstanding loans. 4. On the date close to the publication of the financial statements, the dollar appreciated by 3.5% against the shekel compared to its exchange rate at the date of the Report. It is noted that the impact of exchange rates on next quarter's business results will be determined according to the exchange rates in effect during and at the end of the quarter (September 30, 2017). Eli Defes Chairman of the Board David Maimon CEO August 15, 2017 B19

21 Free Translation of the Hebrew Language Hebrew Wording Binding Condensed Consolidated Financial Statements As of June 30, 2017 (Unaudited)

22 Free Translation of the Hebrew Language Hebrew Wording Binding Free Translation of the Hebrew Language Hebrew Wording Binding Condensed Consolidated Financial Statements As of June 30, 2017 (Unaudited) Table of Contents Page Auditors' Report C2 Condensed Consolidated Financial Statements (Unaudited): Condensed Consolidated Statements of Financial Position C3 C4 Condensed Consolidated Income Statements C5 Condensed Consolidated Statements of Comprehensive Income C6 Condensed Consolidated Statements of Changes to Equity C7 C11 Condensed Consolidated Statements of Cash Flows C12 C13 Notes to the Condensed Consolidated Financial Statements C14 C33

23 Free Translation of the Hebrew Language Hebrew Wording Binding Auditors' Review Report to the Shareholders of Introduction We have reviewed the attached financial information of (hereinafter: the Group"), including the condensed consolidated statement of financial position as of June 30, 2017, as well as the condensed consolidated income statements, comprehensive income, changes to equity and cash flow for the six and three month periods then ended. The board of directors and management are responsible for the preparation and presentation of financial information for these interim periods, pursuant to International Accounting Standard IAS 34, Interim Financial Reporting, and are responsible for the preparation of financial information for these interim periods under Chapter D of the Securities Regulations (Periodic and Immediate Reports), Our responsibility is to express a conclusion regarding the financial information for these interim periods based on our review. We did not review the financial information for the condensed interim period of subsidiaries whose assets constitute 0.4% of the total consolidated assets as of June 30, 2017, and whose income included constitutes 1.1% and 1.1%, respectively, of the total consolidated income for the six and three month periods then ended. Additionally, we have been provided reports by the auditors of an associated company, the investment in which is USD 15,827 thousands as of June 30, 2017, and the Group s share in its results is about USD 385 thousands and 163 thousands, respectively, for the six and three month periods then ended. The financial information for the condensed interim periods of said companies was reviewed by other auditors, 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 auditors. 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 which 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 previous 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 comply, in all material respects, with 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 exposure to class actions filed and certified against the Company and the Company s exposure to these class actions. Brightman Almagor Zohar & Co. Auditors Member of Deloitte Touche Tohmatsu Limited Tel Aviv, August 15, 2017 C 2

24 Free Translation of the Hebrew Language Hebrew Wording Binding Condensed Consolidated Statements of Financial Position Assets As of June 30 As of December USD thousands USD thousands (Unaudited) Current assets Cash and cash equivalents 195,352 Shorts term deposits 80,204 Trade and other receivables 229,096 Derivative financial instruments 1,501 Prepaid expenses 29,461 Inventory 12,756 Total current assets 548, ,632 84,843 * 209,365 3,778 34,847 16, , ,756 30,878 *169,649 17,959 20,592 18, ,174 Noncurrent assets Long term deposits 18,344 Long term investments 24,069 Fixed assets and intangible assets 1,204,601 Derivative financial instruments 1,132 Long term prepaid expenses 5,734 Assets in respect of employee benefits 67,057 Total noncurrent assets 1,320,937 15,387 21,027 1,178,107 7,583 1,197 65,335 1,288,636 18,294 23,830 1,169,563 4,960 5,582 59,653 1,281,882 Total assets 1,869,307 * Reclassified 1,817,654 1,720,056 The notes to the condensed consolidated financial statements constitute an integral part thereof. C 3

25 Free Translation of the Hebrew Language Hebrew Wording Binding Condensed Consolidated Statements of Financial Position Liabilities and shareholders' equity As of June 30 As of December USD thousands USD thousands (Unaudited) Current liabilities Short term credit and current maturities 171,178 Trade payables 163,549 Accounts payable 78,078 Provisions 22,762 Derivative financial instruments 1,882 Employee benefit liabilities 90,224 Income in advance 437,767 Total current liabilities 965,440 Noncurrent liabilities Credit from banks and others 451,253 Employee benefit liabilities 79,149 Derivative financial instruments 1,472 Accounts payable 4,011 Deferred tax liabilities 77,200 Income in advance 44,243 Total noncurrent liabilities 657, , ,037 93,140 11,367 4,976 ** 97,036 * 407, , ,746 ** 76,868 7,137 ** 70,985 44, , , ,655 59,858 17,846 95,606 *313, , ,524 73,809 4,499 86,218 41, ,780 Total liabilities 1,622,768 1,590,244 1,436,005 Shareholders' equity Share capital 155, , ,012 Premium and capital reserves 265, , ,379 Accumulated deficit ) 173,831( **) 199,042( )150,340( Total equity 246, , ,051 Total liabilities and shareholders' equity 1,869,307 * Reclassified ** Immaterial adjustment of comparative data 1,817,654 1,720,056 Eli Defes Chairman of the Board David Maimon CEO Dganit Palti CFO Date of approval of the financial statements: Ben Gurion Airport, August 15, 2017 The notes to the condensed consolidated financial statements constitute an integral part thereof. C 4

26 Free Translation of the Hebrew Language Hebrew Wording Binding Condensed Consolidated Income Statements For a period of six months ended For a period of three months ended Year ended On June 30 On June 30 As of December USD thousands USD thousands USD thousands (Unaudited) (Unaudited) Income from operations 958, , , ,479 2,038,428 Operating expenses ) 810,387( ) 775,751( ) 433,579( ) 413,653( )1,642,417( Gross profit 148, , , , ,011 Selling expenses ) 101,003( ) 92,742( ) 54,576( ) 50,898( )192,565( General and administrative expenses ) 54,315( ) 44,925( ) 25,804( ) 22,828( )94,799( Other income, net 45 1, ,036 1,959 ) 155,273( ) 136,314( ) 80,335( ) 72,690( )285,405( Profit (loss) from ordinary operations ) 7,110( 21,899 26,945 51, ,606 Financing expenses ) 12,454( ) 11,215( ) 6,109( ) 6,066( )24,210( Financing income 2,829 * 558 1,460 * 264 1,083 Net financing expenses ) 9,625( ) 10,657( ) 4,649( ) 5,802( )23,127( Company s share of the profits (loss) of associated companies and revaluation of options in respect thereof ) 229( * 2,197 ) 491( * 1,642 5,981 Profit (loss) before taxes on income ) 16,964( 13,439 21,805 46,976 93,460 Tax benefits (income tax) 3, ) 5,400( ) 11,965( )12,766( Net profit (loss) for the period ) 13,556( 13,607 16,405 35,011 80,694 Profit (loss) per one ordinary share of NIS 1 p.v. each (dollars) Earnings (loss) per share, basic and diluted ) 0.03( The weighted average number of shares (in thousands) used in calculating earnings (loss) per share: Basic and diluted 495, , , , ,719 * Reclassified The notes to the condensed consolidated financial statements constitute an integral part thereof. C 5