Israel Railways in the first quarter: demand is recovering, costs are not waiting

The first quarter for Israel Railways looks very weak at the operating line, but it does not prove that rail demand has broken. Operation Shagat HaAri reduced train movement by about 28%, pushed passenger trips down to 14.4 million, and led to a net loss of NIS 45.6 million, yet January and February were already running at 299 thousand daily trips and the daily pace near publication reached about 303 thousand. The yellow flag is therefore not demand itself, but the difficulty of turning a fast passenger recovery into profitability when the cost base keeps rising. Revenue fell 3%, cost of revenue rose 5%, and Adjusted EBITDA moved from positive NIS 18.9 million to a NIS 42.5 million loss. Positive operating cash flow of NIS 251 million looks good, but it mainly reflects timing in balances with the state and a short-term NIS 79.9 million working-capital loan, not healthy operating earnings. At the same time, cancelling the SEMI contract after the injunction request was rejected gives the company some control back in the electrification chain, but it also highlights how much the capacity projects still depend on contractors, budgets, and the security environment. 2026 currently looks like a proof year: returning passengers need to meet cost discipline, the state mechanism needs to remain stable, and projects need to advance without turning this quarter's operating loss into a structural warning.

Company Snapshot

Israel Railways is a government-owned transport company that operates the national passenger and freight rail network, manages commercial areas in stations, and executes the state's rail development program. Its economic engine is not normal ticket pricing or competition between operators, but the combination of service demand, state operating fees, full state funding of development activity, and the ability to execute large projects on time.

About 87% of first-quarter revenue came from state operating fees, and the company has no actively traded equity screen. The relevant investor lens is therefore the quality of the state mechanism, the standing of Series C bonds, and the pace of projects that allow the network to carry more passengers and freight.

The previous annual analysis, Israel Railways 2025: demand is at a record, but the bottleneck moved to execution and costs, framed the right question: will strong demand turn into profitability and better service, or will a larger railway remain a more expensive system. The first quarter gives only a partial answer. It weakens the operating line, but actually strengthens the view that demand can recover faster than profitability.

Demand Recovered Faster Than Profitability

The headline number in the quarter is a 20% drop in passenger trips, from 18.1 million to 14.4 million. On its own, that looks like a dramatic change in demand. The operating explanation is stronger: train movement was reduced by about 28% during Operation Shagat HaAri, and some stations were temporarily closed. The average daily trip count fell to 223 thousand, but January and February alone had already reached 299 thousand daily trips, and near publication the company was already talking about about 303 thousand daily trips.

That gap changes the interpretation. A reader who looks only at the quarterly passenger total sees a company with a sharp demand decline. A reader who separates the wartime disruption from the more normal run-rate sees a company whose problem is not bringing passengers back, but operating enough capacity efficiently. The punctuality rate adjusted for Red Alert sirens also remained almost unchanged, at 95.71% compared with 95.57% in the parallel quarter, so service did not collapse on that metric.

The problem sits in profitability. Revenue fell from NIS 908.5 million to NIS 880.8 million, a relatively moderate decline, but cost of revenue rose from NIS 857.9 million to NIS 897.2 million. Gross profit of NIS 50.6 million in the parallel quarter became a gross loss of NIS 16.4 million.

Adjusted EBITDA, meaning operating profit before depreciation, amortization, and taxes and excluding lease depreciation, should help read the business before the heavy depreciation layer. Here, even that metric does not rescue the quarter. It moved from positive NIS 18.9 million to a NIS 42.5 million loss, so it is not enough to say that accounting depreciation distorts the picture.

Cash Is Positive, But The Money Still Runs Through The State

The cost breakdown explains why this is not only a temporary fewer-passengers issue. Wage expense rose by about NIS 35 million, security added about NIS 10 million, materials and maintenance another NIS 8 million, cleaning about NIS 6 million, computing about NIS 4 million, and employee transport and operating vehicles another NIS 4 million due to station closures and employee relocation. Fuel, by contrast, declined by about NIS 20 million because fewer trains ran and the fuel price per liter fell.

This is a cost base that moves down slowly and up more quickly. Railway activity can shrink temporarily, but labor, security, cleaning, maintenance, and computing do not fall at the same pace. That is why a 4% decline in passenger segment revenue was enough to move the segment from a NIS 22.5 million profit to a NIS 34.7 million loss. In freight, revenue rose to NIS 83.1 million even though tons transported fell to 1.6 million, but the segment loss widened from NIS 15.5 million to NIS 20.7 million. After the previous freight article, more tons, less economic value, this quarter still does not close the quality-of-activity question.

The right cash frame here is all-in cash flexibility: what is left after operations, investments, development grants, working-capital loans, and leases, not normalized cash generation from a profitable business. Operating cash flow was NIS 251 million, but it was built mainly from a sharp movement in the state receivable and other working-capital items. The state receivable for current operating fees fell to NIS 140.8 million, compared with NIS 514.9 million at the end of 2025, mainly due to the timing of receiving February operating fees.

At the same time, the state provided a short-term working-capital loan of NIS 79.9 million, due to be repaid in December. On the investment side, purchases of fixed assets totaled NIS 1.17 billion and state investment grants received also totaled about NIS 1.17 billion. Liquidity therefore looks comfortable, including about NIS 1.18 billion of cash and restricted cash equivalents, but a large part of the picture is state timing and state-funded development, not independent operating surplus.

There is no immediate stress signal in the bonds either. Series C met all trust deed obligations, no acceleration trigger occurred, and the debt is small relative to the asset base and the state mechanism. Bondholders are not currently looking at a simple liquidity problem. They are relying on the state to keep paying on time, on the operating agreement through the end of 2026 remaining stable, and on projects not creating budget disputes that slow the network.

Projects Will Decide Whether The Quarter Stays Temporary

The first quarter shows broad investment activity even while current operations were disrupted: additions to fixed and intangible assets totaled NIS 901.1 million, and fixed assets under construction reached NIS 17.7 billion. This is a system still building capacity, not only operating existing trains.

The central event inside the chain is SEMI. The court rejected injunction requests against the partial cancellation of the contract in sections of the eastern rail line and Route 431, and after the balance-sheet date the company notified SEMI that the entire contract would be cancelled within 14 days and that guarantees would be forfeited. That improves contractor-replacement ability, but it also proves that electrification and capacity depend on enforcement.

Contractor demands add another yellow flag. They exceed the recorded provision by about NIS 902 million, mainly around fixed-asset construction. Management puts the probability of paying material amounts beyond the provision below 50%, but the company lacks state budget approvals if the full demands are paid. This connects execution, budgeting, and the state mechanism.

The first quarter does not turn the Israel Railways story from positive to negative, but it sharpens the cost of a system that cannot reduce expenses as fast as activity falls. The counter-thesis is that Operation Shagat HaAri distorted the quarter, a reasonable view given the fast recovery and continued state funding. For that view to hold, passenger volumes need to return without leaving the segment in loss, and projects need to progress despite SEMI, contractor claims, and the security environment. Otherwise, the quarter will look like an early warning about the reliability of the state mechanism itself.