El Al Airlines — Israel’s flag carrier — has reached a non-binding agreement to acquire Arkia, a smaller carrier. On Thursday, the carrier formed a non-binding memorandum of intent to buy smaller local rival Arkia after being forced to shrink down following a government bailout during the pandemic.

Arkia would become a wholly-owned subsidiary of El Al under the proposed acquisition. In exchange, Arkia shareholders would receive a 10 percent -14 percent stake in El Al through shares and options, according to a regulatory filing by the airline. The arrangement must be authorized by Arkia’s employees, who own 30% of the company, as well as the Israel Competition Authority.

Arkia will become a subsidiary of El Al and is valued at between NIS 85-120 million ($26.5-$37.4 million) under the terms of the agreement. The agreement states that Arkia will continue to operate as a separate brand with its own staff, most likely as El Al’s low-cost subsidiary.

The Israeli carrier is taking its initial steps toward recovery thanks to the acquisition of IZ, following the reductions in staff and fleet size required to acquire government funds in 2021. It will also enable the airline to pursue its strategic goal of being more than just an airline.

“El Al is entering an era in which it will allow travelers to Israel to enjoy a complete tourism package that includes, among other things, a very high-level flight experience, a wide range of hotels and accommodation options; ground services, including car-rental and public-transportation management applications; insurance products; and tickets to a variety of attractions and events,” Avigal Soreq, CEO of El Al Airlines.

The intention to acquire Arkia fits in nicely with this viewpoint because it will allow EI AI to fly to the Red Sea tourist city of Eilat in southern Israel — which is currently controlled by Arkia and Israir. This comes after EI AI attempted to acquire Israir in 2018 but was denied the merger by competition regulators.

The Airline’s Next Steps

Any agreement would need to be approved by the government, Israel’s competition commission, and the companies’ labor unions. Following a month of due diligence, the companies want to negotiate a contractual agreement within 30 days. Following that, they will have up to 150 days to complete the acquisition.

“We still have a long way to go before the deal to acquire Arkia is completed, which is part of El Al’s strategy to expand into additional areas of activity,” said El Al chairman Amikam Ben Zvi.

Back in October, El Al began talks with Arkia —  who is a leisure-focused airline — about a prospective takeover. However,  The COVID-19 epidemic has taken a heavy toll on both airlines with Israel’s borders being mainly closed to international travelers since March 2020.

El Al — which recently changed ownership and management — was compelled to decrease its personnel by one-third, terminate routes and lower its total Boeing fleet size to 29 from 45 jets in exchange for a government bailout. Arkia joins this agreement with seven aircraft — primarily flying domestic routes and to Europe using Embraer and Airbus aircraft.

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Kalai Raajan

Kalai has always wanted to work in the aviation industry, having been fascinated by its inner workings since he was a child. In pursuit of his dream, he obtained a diploma in aviation management and is currently interning with a low-cost airline, under in-flight policies. In his free time, he loves to engage in recreational activities, and watch sports. In the upcoming years, Kalai intends to pursue his degree at a business school before working as an executive for a global airline around the world.

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