El Al in the first quarter: the emergency hid the normalization test

El Al reported a quarter that looks very weak at the bottom line, but the loss itself is not the most important part of the report. Operation "Lion's Roar" shut activity, created a passenger-compensation provision, and pushed the company to a net loss of $66.7 million, while management estimates that without the operation the quarter would have ended with a profit of about $23 million. The deeper issue is what happened before the operation: in January and February, before the airspace closure, the partial return of foreign airlines had already reduced market share, load factor and RASK, while CASK excluding fuel rose. The emergency therefore did not create the 2026 normalization test. It hid it and pushed it into the next quarters. At the same time, the company entered the disruption with exceptional liquidity, strong advance demand, a loyalty club that is getting a new Isracard agreement, and unencumbered assets that still provide financing flexibility. The report does not say that El Al's profitability has broken, but it also does not allow investors to ignore the question of whether the company can preserve pricing and cash flow when competition returns, fuel rises and the shekel keeps pressuring labor costs. The next proof points are Q2 and Q3: RASK versus CASK, the pace at which foreign carriers return, cash after passenger refunds, and the actual contribution of FLY CARD under Isracard.

The Emergency Created The Loss, January And February Set Up The Next Test

El Al is not only an airline selling seats. Its economic machine combines capacity, load factor, average passenger yield, fuel and labor costs, and a loyalty club that generates cash and ancillary revenue. In recent quarters another test has become central: how quickly foreign airlines return to Israel, and how much of the pricing power created during the scarcity years remains when the skies reopen.

In the prior annual analysis of El Al in 2025, the core issue was whether 2026 would become a normalization year. The first quarter answers that only partially, because March was already an emergency month. January and February give a cleaner signal: demand was still high relative to seasonality, but weaker than in the same months of 2025, as foreign airline activity recovered.

This table matters more than the quarterly loss itself. It shows that when competition began to return, El Al did not mainly lose capacity. It lost excess demand relative to 2025. ASK was almost unchanged, but load factor declined, RASK eroded and unit cost excluding fuel rose. That does not mean the business has returned to a normal environment, because January and February 2026 were still unusual compared with regular years. It does mean that the exceptional strength of 2024 and 2025 has already faced a first test.

Operation "Lion's Roar" then changed the numbers sharply. Scheduled flight activity stopped after Israeli airspace was closed on February 28, 2026. The operation lasted about 40 days, and a full return to routine activity arrived only in early May. The company estimates that the pre-tax hit from halted activity, additional costs and passenger compensation was about $190 million, of which about $120 million was recognized in Q1 and the rest is expected in Q2. After tax, the total impact is about $145 million, of which about $90 million was recorded in Q1.

That means Q1 is not a clean run-rate quarter. Operating revenue fell to $562.4 million, down 27.3%, and operating profitability almost disappeared. Still, January and February prevent the conclusion from becoming too comfortable: without the operation, the company would probably have reported a profitable quarter, but one that already showed yield erosion and higher unit cost.

Post-Operation Demand Is Strong, But It Relies On A Market That Is Not Normal Yet

Management's positive case is not weak. After the operation, the company sees faster demand recovery, a slower-than-previously-expected return of foreign airlines, and high load factors in Q2 and Q3 similar to the corresponding quarters of 2025. It also expects ASK to grow 6%-10% in Q2 and Q3, with RASK rising 1%-4%, partly because of high load factors and partial price adjustments to input and fuel costs.

The supporting number is the order layer. In April 2026, future-flight orders and advance income, excluding loyalty points, stood at $1.204 billion, compared with $1.027 billion in April 2025 and $795 million in April 2024. The company also reported a monthly sales record of about $560 million in April and average daily sales of $21.3 million in the 30 days after Passover, up 31% year over year.

But here too, it is important to separate genuine demand from a temporary environment that gives El Al back some of the market power it lost in January and February. The slower foreign airlines return, the stronger Q2 and Q3 may look relative to the path visible before the operation. That is positive for the near term. It is not full proof that normalization has been postponed for another year.

This gap will also shape market interpretation. If Q2 and Q3 RASK rises within management's range and CASK does not run away because of fuel and wages, the first-quarter report will be read as a noisy emergency event. If, however, the return to routine activity again brings lower load factor, lower RASK and higher unit cost, January and February will look like the beginning of a trend rather than pre-operation noise.

Liquidity Barely Fell, But Much Of It Already Belongs To Passengers, Fleet And Payouts

The all-in cash picture in Q1 is better than the accounting loss, but less free than the headline liquidity number suggests. El Al started the year with $1.961 billion of cash and available liquid resources and ended the quarter with $1.905 billion. A decline of $55.9 million in a quarter that included suspended activity, a dividend of about $102 million and fleet investments is not a sign of distress. It does show that the company continues to receive support from working capital, advance ticket sales and option exercises.

The chart shows all-in cash flexibility, meaning cash after the actual cash uses of the quarter: investments, repayments, leases, dividend and financing movements. It is not a normalized cash-generation metric for the existing business. Operating cash flow was $232.5 million, largely because advance income rose by $111.4 million and suppliers and payables rose by $174.9 million. At the same time, the company's own free cash flow before tax and after debt service fell to minus $78.1 million, compared with plus $92.1 million in the corresponding quarter.

The item that prevents an overly optimistic interpretation is customer obligations. Payables included about $232.8 million that were mostly refunded to customers after the balance-sheet date because of flight cancellations. In addition, current advance income stood at $1.234 billion, including $898.4 million from ticket sales, $122.6 million from vouchers and $200.8 million from loyalty points. There is also a non-current advance-income liability of $251.7 million, including another $96.7 million related to loyalty points.

This is the natural continuation of the prior analysis of El Al's liquidity quality. The cash balance is large, but part of it sits against flights not yet flown, points not yet redeemed, post-cancellation refunds, fleet investment and repayments. The company still has unencumbered assets with an estimated value of $382 million, with another $12 million added after the report date, so financing flexibility exists. But as long as the fleet is growing, the dividend has already left the company and advance income remains high, liquidity is an operating advantage, not free distributable cash.

The Club And The Hedges Buy Time, They Do Not Remove The Year's Cost

Two engines are supposed to soften 2026: the Frequent Flyer Club and hedging. Both are real, and both are less clean than the headline suggests.

At the club, the strategic agreement with Isracard was signed on March 26, 2026 for a 10-year period starting April 1. The company estimates that the agreement will contribute NIS 100-130 million per year on average to group profitability before tax over the agreement period. That is meaningful for a platform that already has about 3.6 million members and about 530,000 FLY CARD holders. In Q1, the club company recorded revenue of $30.1 million and operating cash flow of $36.1 million.

Still, the asset does not translate fully to public shareholders. Phoenix exercised its remaining option during the quarter and bought another 5.1% of the club company for $7.7 million, bringing its stake to 25%. At the same time, the move from Cal to Isracard creates transition costs: a one-time NIS 22.75 million refund of marketing grants to Cal, recorded in other expenses in Q1, and cumulative operating fees of NIS 51.75 million through the end of 2026 by way of royalty offsets. The new agreement is therefore an earnings engine for 2026 and beyond, but the full contribution should be tested after transition costs and at the public-company layer, after Phoenix's minority share.

Hedging tells a similar story. In March, the company sold part of its jet-fuel hedges for June to December 2026 and received $17.3 million in cash. In early April, another portion was sold for $3.0 million, and an additional $5.4 million of hedge income was recorded as a reduction in fuel inventory cost that will be consumed in Q2. These amounts will reduce fuel expense in upcoming quarters.

The other side is that the company ended the quarter with hedge coverage of only about 14% of planned fuel consumption through February 2027, below its regular minimum policy and with risk committee approval. At the same time, the company estimates that under the forward curve at the end of April, fuel expense for April to September 2026 will be about $200 million higher than in the corresponding period, after hedging. The hedge helps the upcoming quarters, but it does not remove the summer fuel-cost test.

The shekel adds similar pressure. A large share of company revenue is dollar-linked, while salaries and some headquarters expenses are in shekels. In Q1, shekel strength against the dollar added about $28.3 million to wage cost, alongside planned headcount growth to support activity and fleet expansion. If demand remains strong, the company can absorb part of that pressure through price and load factor. If competition returns faster, that pressure moves directly into profitability.

Conclusions

The first quarter of El Al cannot be analyzed from the bottom line alone. The loss mainly reflects an emergency event, and the company entered it with large liquidity, strong advance demand, a high-quality loyalty club and financing flexibility. There is no immediate sign here of a broken business. On the contrary, in Q2 and Q3 the company may benefit from strong demand and the slow return of foreign carriers, and its guidance for ASK and RASK growth supports that.

The risk is that the emergency gives the market a reason to postpone the normalization test even though the first two months already exposed it. Lower market share, RASK erosion, higher CASK excluding fuel, greater jet-fuel exposure, shekel-denominated costs and cash tied to customers and fleet are the real 2026 test. If Q2 and Q3 show that strong demand is enough to preserve yield and cash flow after refunds and fuel costs, the thesis strengthens. If load factor and pricing erode again as foreign airlines return, the first quarter will be remembered less as an emergency quarter and more as the moment the normalization problem re-entered the reports.