Israir Group published its second-quarter report. One line in it explains all the rest, and it is gross profit.
Errors or inaccuracies are possible. Spotted something that looks wrong? Write to me and I will correct it.
A note before the figures: Israir reports in dollars, not shekels. All amounts here are denominated in dollars.
The Quarter
| $ millions | The quarter | Share of revenue |
|---|---|---|
| Revenue | 140.7 | |
| Gross profit | 1.4 | 1.0% |
| Operating loss | -13.0 | |
| Pre-tax loss | -18.3 | |
| Net loss | -18.5 | |
| Attributable to shareholders | -18.1 | |
| Non-controlling interests | -0.4 | |
| Basic loss per share | -$0.07 | |
| Balance sheet total | 545.7 | |
| Shareholders' equity | 78.4 |
The Number That Decides: 1.0%
Of $140.7 million of revenue, $1.4 million of gross profit remained.
And this is worth dwelling on, because it differs in kind from an ordinary loss.
Gross profit is what remains after the direct costs of delivering the service - in aviation: fuel, flight crews, airport fees, aircraft leases and maintenance.
Here those costs consumed 99% of revenue.
The meaning: the quarter did not fail because of head-office expenses. It entered the operating line with almost nothing to work with. Every cost that is not direct - marketing, administration, sales - falls straight below zero.
So the operating loss of $13.0 million is no surprise given gross profit of $1.4 million. It is an arithmetic consequence of it.
And the Line Beneath: A Tax Charge on a Loss
A pre-tax loss of $18.3 million, and a net loss of $18.5 million.
That is, the loss grew after tax rather than shrinking.
And that looks puzzling until you understand how it works.
A loss does not automatically entitle a company to a tax refund. It creates a deferred tax asset - but only if future profit is expected against which it can be offset.
And when that assumption weakens, the company does not recognise the asset - and sometimes even reverses an asset recognised in the past.
In parallel, in a group with several companies, a profitable subsidiary may be paying tax even while the group as a whole is loss-making.
Which of the two happened here - the structured filing does not detail, so I do not assert. What is clear is that tax added about $0.2 million to the loss rather than reducing it.
Equity Against the Loss
| Balance sheet total | $545.7 million |
| Shareholders' equity | $78.4 million |
| Ratio | 7.0 to one |
And this is the proportion worth holding: the quarterly net loss, $18.5 million, is about 23.6% of the company's equity.
Almost a quarter of equity, in a single quarter.
And as for the leverage itself - 7.0 to one sounds high, and it needs to be read in context. In aviation, the leases standard presents leased aircraft as a right-of-use asset and a matching liability, so an airline's balance sheet is structurally inflated relative to a business that does not lease its core equipment.
And the Seasonality
The second quarter is not the strong quarter in Israeli aviation. The peak of outbound tourism falls in the third quarter - July through September - so a weak spring quarter is not necessarily representative of the year.
What can be said with certainty from this report is that a gross margin of 1.0% leaves no cushion to absorb seasonality. In a business with a 30% gross margin, a weak quarter reduces profit. Here, a weak quarter produces a loss.
הזווית שלי
דעה אישית של אילן אברמוב - לא ייעוץ ולא המלצה
What I take from this report is how early in the chain the outcome is decided.
Most discussion of loss-making companies focuses on administrative expenses, on efficiency and on cost-cutting. In this report that has little bearing: the quarter was decided on the first line after revenue. When the gross margin is one percent, no amount of head-office efficiency closes a $13 million gap.
And what I would look for in the full accounts is the breakdown of those direct costs - above all fuel and aircraft leases. These are the two items that can move by tens of percent between quarters, and neither is under the company's control. Crude passed $91 a barrel this week, and that touches this line directly.
And what I hold as context, not as a forecast: a gross margin like this is not a stable state over time, and equity - $78.4 million - defines how many such quarters can be absorbed. That is arithmetic, not an assessment.
(It is important to stress: this is my personal opinion only, and nothing herein constitutes a recommendation to take any action.)
