Israel Railways 2025: Demand Hit a High, but the Real Bottleneck Is Execution and Cost

Getting to Know the Company

Israel Railways is not just another transport company. It is a national infrastructure platform that runs passenger service, freight transport, station commerce and a very large development pipeline. The most important number for understanding the model is not the trip count, but the fact that about 86% of revenue comes from operating fees paid by the state. In other words, this is a business with real public demand, but its economics are shaped just as much by the subsidy mechanism, project execution and cost control across a very large system.

What is working right now is quite clear. In 2025 passenger trips rose to 71.8 million, up 10%, daily average trips rose to 279 thousand, and by year end the system was running an average of about 619 trains a day across 67 stations. The fourth quarter also improved sharply, with 19.4 million passenger trips, up 22%, and quarterly revenue of ILS 921.3 million versus ILS 861.8 million in the comparable quarter. Demand is not the problem.

The problem is translating that demand into operating economics. The company ended 2025 with revenue of ILS 3.65 billion, up 5%, but with an operating loss of ILS 26.9 million versus an operating profit of ILS 27.1 million in 2024. Even the bottom line, a net profit of ILS 47.9 million, looks better than the operating reality because it also includes net finance income of ILS 56.8 million and deferred tax income of ILS 18 million. It is a mistake to read the bottom line without unpacking the structure.

The active bottleneck now is execution. Not demand, not immediate liquidity, and not capital-market access. The company runs a national platform with state backing and stable debt ratings, but over the next few years it has to prove that electrification, Route 431 rail, the Eastern Railway and ERTMS will actually expand capacity and lower operating pressure, rather than just creating more managerial load and more interim cost. Until that happens, 2026 looks more like a transition year that has to prove itself than a breakout year.

There is also a practical screen constraint worth putting on the table early. This is a bond-only issuer, with no listed equity, no short data, and effectively one central tradable security. So the right way to read the company is first through business quality and credit quality, and only then through a market lens in the usual sense.

The economic map for 2025 looks like this:

The opening chart captures the central paradox of 2025: revenue did not collapse, but operating profit did.

To understand the operating scale of the company, it also helps to look at the resource profile. At the end of 2025 Israel Railways employed 5,145 people, up 4.3% from 2024. The passenger division employed 1,367 people, rolling stock 1,107, freight 529 and development 518. On ILS 3.65 billion of revenue that works out to about ILS 710 thousand of revenue per employee, but that ratio needs to be read carefully: in a company like this, system capacity and availability matter more than office-style productivity measures.

Events and Triggers

The structural merger: On June 3, 2025, the merger of the subsidiaries into the company was completed. Freight activity and commercial development activity were brought back into the parent, while the company committed to continue reporting them as separate segments. That simplifies the structure and the state interface, but it also puts more direct accountability for freight and station real estate on the core management team. In plain terms, fewer structural layers, more execution responsibility.

War and operating disruption: 2025 was managed under the shadow of the war and subsequent operations. The company states that the main projects, Route 431, electrification, ERTMS and the Eastern Railway, were affected in their timetables by labor shortages, a lack of foreign experts and missing engineering equipment. During the fighting the company also granted fixed-rent relief to tenants operating in stations between June 13, 2025 and June 28, 2025. As of the report date, the company was operating 55 of 67 stations.

Management change at a sensitive moment: On March 5, 2026, Avner Flor was appointed acting CEO due to the temporary incapacity of CEO Avi Elmalich, until May 4, 2026, his return, or a permanent appointment, whichever comes first. This does not create an immediate economic shift, but in a company where the core story is execution load and state interfaces, management stability at this moment still matters.

A more encouraging credit signal, but not friction-free: In March 2025, Maalot still rated the company and the bond ilAAA with a negative outlook. In August 2025, Midroog reaffirmed Aaa.il with a stable outlook. In November 2025 and January 2026, Maalot returned to ilAAA with a stable outlook. That is a positive signal, but it is important to remember that the ratings also lean on the state envelope, not only on operating profit quality.

The state agreement is still the most important event: The current development and operation agreement covers 2022 through 2026, with an option to extend by two years subject to agreement. The company is already in talks to add a monthly wage-related mechanism of ILS 994,403 starting in January 2025. It may look technical, but in practice it shows that even after the big agreement was signed, the mechanism is still not fully settled at the level of each major cost component.

Efficiency, Profitability and Competition

The main story of 2025 is not a demand problem. It is a conversion problem. More passengers, more tons, more activity, but less operating profit. This is not ordinary cyclical erosion. It is a reminder that a national infrastructure operator can show growth in activity while still coming under profit pressure if cost, contract structure and execution are not moving together.

Passengers: demand improved, margin did not follow

The passenger segment ended 2025 with revenue of ILS 3.234 billion, up 5% from 2024. Passenger trips rose to 71.8 million, 10% above the prior year, and the average daily count climbed to 279 thousand. On the surface that looks like a clean growth story.

But segment profit in passengers fell from ILS 86.9 million to ILS 69.9 million. That is exactly the point a casual reader could miss. More trips did not translate into more segment profit because the system is already operating under heavier pressure, with more employees, more security, more IT, more maintenance and lower punctuality. Annual punctuality, adjusted for siren effects, fell from 96.8% to 94.05%, and in the fourth quarter it fell to 92.01% from 96.18% in the comparable quarter. The system is not just bigger, it is also working harder.

The fourth quarter does offer a clue to what could improve next. In that quarter passenger segment revenue rose 8% to ILS 817.2 million, and passenger trips jumped 22% to 19.4 million. Quarterly gross profit also rose to ILS 56.8 million from ILS 20.6 million a year earlier. That does not prove the problem is solved, but it does show that when operating disruption eases, operating leverage can reappear.

Freight: more tons, less value

If there is one line in the report that shows why volume can mislead, it is freight. In 2025 the company carried 6.6 million tons, up 8%, mainly thanks to containers, terminal openings and port connections. And yet freight segment revenue fell 2% to ILS 323.9 million, while the segment loss widened sharply to ILS 62.6 million from ILS 23.2 million in 2024.

The direct explanation is structural, not accidental. The company explains that the revenue decline stemmed from the cancellation of a fixed subsidy component for the segment, amounting to ILS 24 million annually and ILS 6 million in the fourth quarter. In other words, workload increased, but economics per unit of volume weakened. That is the difference between operational growth and economic growth.

That has to be read together with customer concentration. In 2025 ICL accounted for about ILS 102 million of freight revenue, around 55% of the segment's external revenue and around 40% of freight activity. The current agreement was extended through December 31, 2026, with a possible five-year extension by mutual agreement, and as of the report date discussions on a new agreement were still ongoing. This is the heart of the freight story: even if transport volumes rise, revenue quality does not really improve when the segment depends both on a subsidy decision and on one anchor customer.

Beyond that, the company has a built-in competitive disadvantage against trucking and coastal shipping. In most cases it does not reach the customer door directly, complementary transport is required, and the number of terminals in strategic locations is still limited. That means higher volume does not automatically signal pricing power.

What really consumed profit

At the company level, the move from an operating profit of ILS 27.1 million in 2024 to an operating loss of ILS 26.9 million in 2025 did not come from a collapse in revenue. It came from cost growing faster than revenue.

Cost of revenue rose by ILS 241 million. The company breaks that down into ILS 154 million of higher payroll expense, ILS 48 million of higher maintenance and operating expense, ILS 40 million of higher security expense, and ILS 8 million of other expenses, including damage to electrification infrastructure. Fuel expense, by contrast, fell by about ILS 10 million, and general and administrative expense fell by about ILS 12 million. Anyone looking for the problem in the wrong place, such as fuel alone, is missing the story.

There is also a quality shift here. A large part of the cost increase comes from supporting a bigger and more complex system, with more labor, more security, more IT and more maintenance. That is not necessarily bad if it is building the base for future capacity. But as long as the projects are not yet releasing the bottleneck, the company is living through an expensive interim phase.

Cash Flow, Debt and Capital Structure

The right way to read the balance sheet is not "how much cash is there," but "what cash is actually free." In a company like Israel Railways, it is critical to distinguish between operating cash that management can use with some flexibility and cash that is earmarked for development and arrives from the state against specific projects.

The cash picture: a lot of numbers, but not all of it is truly available

At the end of 2025 the company had ILS 233.8 million of unrestricted cash and cash equivalents, versus ILS 107.6 million a year earlier. It also had ILS 259.6 million of restricted or designated short-term cash and another ILS 364.8 million of restricted or designated long-term development cash. In total, the cash flow statement closed with ILS 858.1 million of cash and equivalents, but that is not one pool of freely available cash.

The company itself explains that the increase in unrestricted cash mainly came from earlier partial payments of operating fees and from VAT refund timing. At the same time, investing activity generated a positive cash flow of ILS 393.3 million because government investment grants received, ILS 5.33 billion, exceeded purchases of fixed assets and intangible assets. Anyone who sees the rise in cash and concludes that business flexibility improved sharply could be reading too much into the headline.

Because the thesis here is about financing flexibility, the right lens is all-in cash flexibility rather than operating cash flow alone. On that basis, ILS 144.2 million of cash from operations is a better number than net profit, but it still does not tell the full story, because during the year the state also provided a short-term bridge loan of ILS 90 million for working capital, which was fully repaid by the report date. So flexibility exists, but it depends on a government mechanism and payment timing, not on full financial independence.

Debt is relatively small, but dependence on the state mechanism is large

On classic financial debt, the picture is comfortable. The company had no bank loans as of December 31, 2025. Bond liabilities stood at ILS 11.6 million short term and ILS 60.8 million long term, and there was also a reserved fund of ILS 17.2 million for bondholders. The market value of Series G at the end of 2025 was ILS 67.5 million, and the company was in full compliance with all trust deed terms.

But that does not mean financing risk has disappeared. The new development and operation agreement states that the government may delay disputed payments, make offsets, and even cancel the agreement on 90 days' notice. The agreement also restricts the company from taking credit without prior written approval from the Accountant General and the Director General of the Ministry of Transport. So the real question is not "is debt large," but "how certain is the mechanism that moves the money." In that sense, ratings stability is an encouraging sign, but it is not a substitute for smooth and predictable state support.

The balance sheet is huge, but that does not mean capital is freely accessible

Israel Railways ended the year with total assets of ILS 47.6 billion. That is a very large number, but the composition matters. ILS 17.47 billion sits in construction in progress, and ILS 43.75 billion is recorded as deferred income from government grants. This is not a hidden pool of internally generated capital. It is the balance sheet of an infrastructure body developing assets with government support and recognizing them over time. Size alone is therefore not a measure of strength.

Outlook and Forward View

Before moving into the outlook, there are five points that should not be missed:

• Net profit flatters the picture. The company moved into an operating loss, and the gap to net profit is mainly explained by finance income and deferred tax income.
• The issue in passengers is not demand but conversion. 71.8 million trips still did not lift segment profit.
• The issue in freight is not volume but economics. More tons were carried, but revenue fell and losses widened because of subsidy structure and pricing.
• Cash increased, but a large part of the improvement came from development inflows and payment timing. That matters, but it is not the same thing as free cash generation from the business.
• The most important number going forward is not the passenger count but the number of milestones delivered on time. Without that, cost will keep running ahead of capacity.

This looks like a transition year that has to prove itself

Management does not explicitly call this a transition year, but that is what the report implies. In the impairment-indicator review, the company based its 2025 to 2028 outlook on the current agreement, electrification, additional capacity, the Eastern Railway and the line along Route 431. From 2029 onward, the forecast assumes a model in which revenue reflects operating expense plus normative profitability and incentives, with management estimating that rate at about 4.45%.

The important point is that the company itself shows that the cleaner economic model is still several steps ahead. 2025 was not a harvest year. It was a year of carrying the interim cost. Even in the 2025 indicator review, the company concluded that no new impairment estimate was required because changes in the multi-year plan implied only a decline of tens of millions of shekels in value in use, far below the prior surplus over book value. That is a reassuring signal, but also a reminder that the model still depends on forward operating and regulatory assumptions.

What has to happen in passengers

For the thesis to strengthen, it is not enough for passenger numbers to keep rising. The company has to show that rising demand is starting to meet better operating capability. That means better punctuality, more capacity, and efficient absorption of electric rolling stock and projects such as platform extensions, electrification, Route 431 and the Eastern Railway. If 2026 still shows more passengers but further erosion in segment profit, it will be hard to argue that the system is moving toward a better equilibrium.

What has to happen in freight

Freight needs a sharper change. First, the company has to show that it can stabilize revenue economics after the cancellation of the fixed subsidy component. Second, it has to show that more terminals and port connectivity are translating not only into volume but into a better margin profile. Third, it needs higher certainty around the agreement with ICL, because when one customer accounts for such a large share of external revenue, it is hard to argue that the segment is truly diversified.

What has to happen in the operating structure with the state

The current agreement ends at the end of 2026. There is an option to extend it by two years with mutual consent, but the fact that the company is already in talks over an additional wage mechanism shows that the framework is not fully closed. Bond investors and anyone following the company should be watching not only for operating delivery over the next two years, but also for stronger institutional certainty around the payment mechanism, wage formula, offset boundaries and funding timing.

What the market could miss on a first read

Anyone reading only the headlines could come away with two positive impressions: positive net profit and a sharp rise in passenger traffic. Both are true, but neither is enough. The deeper read is that a good fourth quarter is already visible, but for the full year the system still did not translate higher activity into a cleaner economic profile. The 2026 and 2027 story will therefore be less about "how many passengers were carried" and more about whether capacity opened up, service quality held, and the state mechanism moved in line with cost.

Risks

The first risk is state-agreement risk. The company is materially dependent on the development and operation agreement, and that agreement gives the state the ability to delay payments, apply offsets and even cancel. In Israel Railways' business model, that is much more than a legal footnote. It is the core risk layer separating a large balance sheet from real liquidity.

The second risk is project-execution risk. The company itself points to delays and pressure around the Eastern Railway, the fourth Ayalon track, Route 431, ERTMS and electrification. If those projects continue to slip, the company will be left with higher expense, more congestion and no real capacity step-up to justify the cost.

The third risk is freight concentration risk. The segment is already loss-making, and its revenue depends both on subsidy structure and on one anchor customer. If negotiations with ICL weaken or if competition from trucking and coastal shipping intensifies, it will be difficult to contain losses without a broader structural change.

The fourth risk is labor and cost risk. Headcount rose to 5,145, and most employees are unionized. Spending on wages, security, IT and maintenance has already moved higher. If capacity does not rise fast enough, the company may keep chasing higher demand with a cost base that is growing too quickly.

The fifth risk is geopolitical and operating risk. By the report date the company had already experienced damage to stations, compounds, parts of the rail network, electrification infrastructure and railcars, even if management currently assesses the damage as not material. This is not a theoretical risk. It is one that has already occurred, even if without a material hit so far.

Conclusions

Israel Railways ends 2025 with a two-way story. On one hand, demand is strong, the fourth quarter improved, ratings are stable and debt is relatively small. On the other hand, the company can no longer rely on the argument that "more passengers" is enough when operating profit has turned into an operating loss and freight is deteriorating despite higher volume. In the near to medium term, market interpretation will be driven mainly by whether the project load starts to convert into real capacity, not by whether passenger counts keep hitting records.

The current thesis: Israel Railways is a national infrastructure platform with real demand and state backing, but 2025 showed that the main bottleneck has shifted from demand to execution and the conversion of cost into capacity.

What changed versus the earlier read of the company? Mainly this: it is no longer possible to argue that freight weakness or margin pressure comes from soft demand. Demand rose. Volume rose. If operating profit still deteriorated, the test has moved to execution, agreements and cost control.

The strongest counter-thesis is that the 2025 operating weakness does not really matter: the company has a state-backed infrastructure monopoly, full development funding, high credit ratings and projects whose economics are still ahead of it. That is a serious argument. The problem is that it requires a great deal of confidence that the projects will be delivered on time and that the state mechanism will continue to move smoothly.

Why does this matter? Because Israel Railways is not being judged on one more year of small profit or loss, but on its ability to turn billions of shekels of public investment into better service and more stable operating economics. Over the next two years the company has to show better punctuality, a real capacity step-up, stronger definition of the operating mechanism and genuine stabilization in freight. If that happens, 2025 will read as a transition year. If it does not, 2025 will look like the year in which demand had already said yes, but the system still could not answer.