Yet Another Value Podcast 对 $EL 的判断变化

assuming the ATL normalizes fine, they're still going to have a cash balance. They're still going to have They're still going to own 80% of their fleet. Like 2 years ago it was like it was only 50% of the fleet. I think about this all the time. You're right. Like this screams This thing is over-earning, right? Like how could you not be concerned that there's going to it's going to mean revert, and the stock's not going to work because it's just going to be very difficult.

And I I think that I would I would point back to like their last clean year, which was really sandwiched between COVID and the and the war on October 7th was 2023. And in 2023, like they were profitable, you know, after CapEx, after leases, after, you know, amortization of loans. So, and they to the tune of like 100 to 200 million dollars in free cash flow.

So, I kind of look at it like that. Like, worst-case scenario, I you know, that let's say they go back to that. Like, you're looking at a $2 billion EV and normalize, you know, at least 150 to 200 million in free cash flow, I feel like I'm willing to take that bet.

Um but like, I don't think I think that's going to be low because they permanent they they've added a lot of capacity. Um it's not clear how much capacity they've added because some of it is uh wet leases. So, those wet leases are, you know, they're temporary leases that they have, but that's the minority of it. That's the minority of it. The majority of it is just, you know, they've added to their fleet.

your write-up again the the killer line and people should go read the write-up. It's at the end, but the killer line you have is, "Hey, our the downside here is supported by they've got the 1.3 billion of net cash that we talked about. They own a lot of their planes and go look at plane prices." Like, owning planes the all these planes are in the money. You say, "Hey, they own a billion plus of planes and they've got an external valuation on their branded credit card program that's and loyalty program that's worth 700 millionish." So, that's 3.5 billion in kind of hard asset value versus an EV of you depending on how you keep treat the cash, 2 billionish, right? So, you're buying it at a substantial discount.

Yeah, I I think um I mean, look, I'm a journalist. I'm not an airline expert. The right way to probably do the valuation is to like, you know, segment across like percentage of the fleet that is owned, but I think directionally, the more planes you own in this environment, given how expensive leasing is, the higher your multiple should be. And, you know, the the better the balance sheet. I mean, I just see a lot of things that indicate to me they should at least trade with the rest of the group and not at a discount.

Now, obviously, there's a huge geopolitical risk factor, but as crazy as it sounds, like they've proven that like they can fly under all circumstances, and they have an implicit backstop of the government. So, like when things got really um intense, like the government stepped in, and, you know, basically, you know, said they would insure the planes when the private insurers would, you know, commercial insurers step out.

So, I, you know, I don't want to overthink it, but I think they deserve, you know, at least to trade in line with the peers, which would be a really nice return from here. Question is obviously like on what multiple normalized earnings, but like, you know, that's that's the guesswork, you know, like there's been permanent, you know, increase in their capacity,

and I think, you know, but like I, you know, the the the the big X factor now is like jet fuel, you know, so like that's kind of masking some of the um you know, improvement in underlying earnings power, but like I think once things normalize, you're just going to see a business that's generating a lot more free cash flow, and it should it should trade, you know, in line with the peers.

No, and it's interesting cuz you know, airlines one of the questions I have in my head is kind of like, hey, everybody every value investor you say airlines and people think Warren Buffett 1990 call 1-800-Airlineaholic or whatever, right? But the interesting thing here is because it's an Israeli, like there are limited slots. And it it's got to me, and you can correct me if I'm wrong, but it's got a lot of the New York City components to it, where in airlines, and I remember this from the Spirit JetBlue trial, like yes, airlines are super, super competitive across the domestic board, but there's limited spots in New York City, and those are really valuable cuz those spots, because there's supply and a lot of demand coming in, those spots are hugely valuable, hugely profitable. You know, I look at Israel, and I think you could imagine a lot of the same with the Tel Aviv airport. There's limited spots, a lot of international demand, and guess what? Everybody left. So, these guys took, I think it's like 50% of the spots in Tel Aviv. Again, you correct me if I'm directionally wrong, but yes, there they put on a lot of supply, but they took out a lot of the best supply, and they own it, and there's no way out for anyone else to come unless they like build a new terminal or something. So, you've kind of got a really interesting setup there. You You can tell me if I'm misthinking about any piece of that.

Now, who knows how long this war goes on? Like, you know, who was I listening to the other day that like, you know, every war that's been started like the troops are going to be home by Christmas. It's like the nature of these things that like they go on longer than people expect. So, like we're 6 months into this Iran conflict, like who knows, right? So, I kind of look at it like I would be long this, you know, just on normalized earnings, whatever those are, you know? And I think right now the setup is you have a few more at least, you know, two more quarters of like just gushing windfall profits that further kind of like buy down your enterprise value. And you're buying like the number one, you know, you're buying everyone wants to own the number one in a market. Like this is the undisputed number one. It has like these great brands. And um you know, that that kind of like got me over the hump to to own an airline as much as like you know, it's uh

Let Let me go to you mentioned the profits, right? So, they're kind of making windfall profits right now cuz wartime, everybody else leaves, they get the slots. I think people might look at the windfall profits in two ways. One, they were the state of Israel obviously has a lot of say here, right? They were kind of required to run and I believe part of their our operating agreement says the state of Israel can require them to run in extreme emergencies and can require them to staff no matter what. So, I think there's two sides to that. One, people worry, "Hey, these guys are going to be required to run uneconomically on the downside." And then the counter is and you can tell me if I'm wrong, but you know, I I was familiar with the golden share, so I was just kind of googling around while I was prepping for this podcast. The golden share is Israel owns a piece of some like kind of state state-ish companies that gives them blocking rights over mergers and stuff. And as I was googling around, I saw hey, they got hit with a competition authority fine for $40 million for excessive and unfair pricing from October 2023 to May 2024. And that makes me worry, "Hey, are you going to have the worst of both worlds, right? If there's no demand because of war or something, you're going to be required to fly, but if you there's tons of demand and everybody's coming out and you try to kind of increase your pricing to wartime wartime pricing, they're going to hit you with they're going to hit you with fine. So, on the downside, you have to have all the capacity operating and on the upside, you get fined for the supernormal profit. So, how would you kind of think about the That's just general state of Israel risk, I suppose, but it's also like regulation risk, all of that type of stuff.

Yeah, you have to get comfortable with it. Like I think first of all it's kind of it's scary to like invest in a foreign country. Um just it's just like, you know, there's a different currency and a different government. I think Israel is relatively, you know, capitalistic and sane. And I think that backdrop to go back to COVID, the fact that they did not bail out the airline. Like anything's possible cuz it's the government, but like there is there is like a recognition and understanding like they stepped into the lurch and bailed this thing out when they were like losing, you know, tens of millions of dollars on a monthly basis. Like no one knew this is in the depths of COVID. So, I think they my my my take on it is they respect the property rights. Yes, of course El Al is the holding to the government. Like in and that's actually what happened in April this year. Like they were, you know, they had to fly flights at like very, you know, very reduced capacity because of restrictions from the government just in for safety reasons. And of course El Al did it. El Al but that's like you know, that's just the nature of the um that's the position they're in.

Like what one other quirk that I think is important is that one of the things that differentiates You know, the big question with airlines is like they're all flying the same planes. Right? They all buy this like what, you know, they're all using the same airports. So, you're right. Like the slots are important. But even like once, you know, they all they all assume they already have same slots. Like how do you actually differentiate yourself? So, of course there's some things here and there like bells and whistles in the cabin. But El Al like has the leading security like like you know, end up There's no one else that does security like El Al does for obvious reasons. And so, part of the way the security works is that the government mandates that they have this like super security. It's very expensive. They have like they have people in local markets and also in foreign markets that like interrogate passengers. They'll ask you like random trivia about the uh the Bible to like, you know, they just like they just try to like, you know, mess with you to like make sure like you're not a terrorist. So, that costs a lot of money and the government imposes that upon them a law. So, like this was probably missed, but you know, last year they renegotiated that cost-sharing agreement and the government, you know, like they basically share the cost for that extra security. The point is it's more collaborative, it's like a partnership, like the government appreciates what they do. And they provide they stepped in and they provided a lot of capacity when everyone left the market. So, I'm not concerned about, you know, that risk that the government's going to try to I mean, look, you see this there's there was a lawsuit and like it's it's $40 million. It's not nothing. Um but it's not like a kangaroo court thing where like they can't have their day in court. It's like a pretty western capitalistic, you know, where they're, you know, you're going to be able to defend yourself and um

So, you know, you've got this company you've got them trading at 2x EBITDA versus United Airlines at 6x. And I guess my question would be, "Hey, is a largely domestic US player scaled US player that gets a lot of profits from the loyalty program and the credit card points, which I know LL does as well, but I mean that pales in comparison to the might of the US consumer. Is that really the right comp? Cuz if I went to kind of the second tier of airlines, I think you'd find a lot of them are trading kind of around this pricing."

Yeah, I mean, I I I I I I hear that pushback. I think I'd just go back to like what I said previously, that there's just a lot of characteristics in this setup that like speaks to the quality of the asset and the you know, the durability and opportunity and you know, like the the the niche that they play in. So, that's that would that's, you know, unique to them. Um but yeah, I don't I haven't studied those other airlines. So, like I

It completely okay. Completely okay. And look, at some point 2x EBITDA is 2x EBITDA. But, let me focus on the EBITDA number cuz I I think this is a more interesting question, and this is one that jumped out to me. So, EBITDA obviously DNA is the back depreciation amortization. I've done a lot on aircraft and aircraft lessors. And like, you know, the most important things for aircraft for airlines, aircraft lessors, everything is getting the plane going, right? The The less time you can have on the ground, the more time you can have up in the air because the plane is your big expense, and that depreciation is is massive on the plane. LL follows Jewish holidays, right? So, they don't fly on the Sabbath, and they don't fly on major holidays. So, that's roughly what, 12 to 15% of the year that they're kind of not flying on if I'm doing 1 / 7 plus some holidays correct in my head.

Yeah, I think that applies in two ways, right? When they're buying aircraft and they go and they buy a new Boe- Boeing airline, the you know, Boeing's going to sell to the high bidder for the most part. Uh El Al is competing against, you know, Thai Airlines or Jet2 or who's going to run it 24/7 basically. El Al's going to run run it kind of in that math 26 or something. So, they're paying 24/7 pricing for something they're they're going to run 26. So, my first question would be, how can they make that economics work? And then my second question is, if we're valuing it on EBITDA, but 15% of the time they have an unproductive asset, should we actually be hair cutting them for that 15% of time the assets are on the ground?

Yeah, it's a great question. So, and I think this is like interesting. I think this speaks to what's happened that they've they've they already had like a large percentage of their planes that were owned, and then like like I said, since 2025 they've they've bought back nine planes.

So, whatever, you know, like they don't share the exact, you know, what they're underwriting to, but like it seems very clear that leasing is not the optimal, you know, for it could be for the reasons that you've talked about. I just think in general like leasing has gotten much more expensive. Your total cost of ownership when you lease a plane, like you have to return the lease the plane in a certain condition, right? You have to like redo the engines and everything. Like you wouldn't do that if you were, you know, if you would probably whatever it is, you know, assuming it's safe, you would push out that scheduled maintenance. So, I think that, you know, they're they're probably responding, that's part of the reality is like why they're like buying their planes off lease.

You could cut you could cut the EBITDA by 15%, but then I would just like let's look at the last normal year, like they were they were doing fine. You know, like this this business has been, you know, 6 years ago seems so long ago, but like let's the post COVID it's hard to like talk about pre-COVID because it was just a different business. Like it's new ownership, like different balance sheet, everything. But like, you know, if you take it as it is, like I can't envision a scenario where these guys wouldn't be profitable, like, you know, in their market.

It is just you know, the the DNA line I do worry would I rather $1 of EBITDA from these guys or $1 of EBITDA from Jet2, where the depreciation is kind of going to be 15% lower at Jet2 just because they run at 7% 15% more.