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EL AL ISRAEL AIRLINES LTD. FINANCIAL STATEMENTS AS OF June 30, 2016 (unaudited(

CONTENTS

SECTION B - DIRECTOR'S REPORT SECTION C - FINANCIAL STATEMENTS

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El Al Israel Airlines Ltd. Board of Directors Report of the State of the Corporation’s Affairs For periods of three and six months ending on June 30, 2016

A. Explanations of the Board of Directors as to the State of the Corporation’s Business: A1.

General and key data

We are pleased to submit the Board of Directors Report of the State of the Corporation’s Affairs for periods of six and three months ending on June 30, 2016. The Company serves as the leading air carrier of the State of Israel in most of the international routes operating to and from Israel. The Company’s main operations involve the transport of passengers and cargo, including baggage and mail, on scheduled flights (mostly) and charted flights between Israel and foreign countries. In addition, the Company is engaged in providing transport and maintenance services at its hub airport, in the sale of duty-free products, and through affiliates in related activities, which primarily involve the production and supply of food for airlines and the management of a number of travel agencies overseas. For information regarding the Group’s operating segments, see Note 8 of the Company’s financial statements. The business environment in which the Company operates is the international and civil aviation and tourism industry to and from Israel, which is characterized by seasonality and the high level of competition, intensifying during periods of excess capacity and high sensitivity to the economic, political and security situation in the country and the world. Main data for the periods of six and three months ending on June 30 (USD millions):

Operating revenues Operating expenses Gross profit EBITDA Profit before income tax Profit for the period

For a period of six months ending on June 30 2016 2015 Change 934 930 0%

For a period of three months ending on June 30 2016 2015 Change 537 511 5%

(776)

(775)

0%

(414)

(408)

1%

158 106 13

155 93 2

2% 15% 601%

124 96 47

103 67 24

21% 43% 99%

14

1

938%

35

17

102%

B-1

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A2.

Review of the developments in the business environment and operational metrics

A2.1

Review of the business environment in which the Company operates

For a period of three months ending on June 30: Traffic at Ben Gurion Airport: The following charts describe the developments of the traffic of passengers at Ben Gurion Airport, both passengers and cargo, divided by inbound and outbound tourisms, and regarding the cargo, divided by imports and exports. In the current quarter, the trend of growth in passenger traffic at Ben Gurion Airport continued, as a result of significant increase in traffic of Israelis going abroad, despite the continued stagnation in incoming tourism, while the cargo area continued the trend of increase in imports, along with the lack of change in the volume of exports compared to last.

Cargo and passenger traffic at Ben Gurion Airport:

2016 2015 Thousands Incoming tourists * Departing Israelis * Cargo import - tons ** Cargo export - tons **

712 1,537 42.0 33.7

Change Thousands %

719 1,306 37.9 33.7

(7) 231 4.1 (0.0)

(1%) 18% 11% -

Source: the Central Bureau of Statistics ** Not including cargo in transit.

Incoming tourism to Israel and outbound residents (in thousands): 1,537

1,306

1,230

1,800 1,400

972 1,000

705

845

719

712

600 200 -200

Incoming tourists

Departing Israelis

*Source: the Central Bureau of Statistics

B-2

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Imports and exports of cargo by air to and from Israel (in thousands of tons): 60

33.8

34.4

33.7

33.5

42.0

37.9

50

40 33.7

33.7

30 20 10 0

Export

Import

* Source: Airport Authority

Jet fuel: In the reported quarter, there is still a considerable gap in jet fuel prices compared to prices that prevailed in the corresponding quarter. Development of the average jet fuel price and crude oil in the market: $/Barrel

cent/gallon

500.0 120.0

109.8

103.3

450.0 400.0

100.0

350.0 80.0 60.0

300.0

276.1

63.5

288.1

250.0

47.0

40.0

150.0

175.9 $/Barrel

200.0

cent/gallon

128.7

20.0

100.0 50.0

-

0.0

For a period of six months ending on June 30: 2016 2015 Thousands Incoming tourists * Departing Israelis * Cargo import - tons ** Cargo export - tons **

1,259 2,545 82.2 70.3

1,251 2,201 75.4 71.0 B-3

Change Thousands % 8 344 6.8 (0.7)

1% 16% 9% (1%)

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A2.2

The Company’s operating metrics and market shares

For a period of three months ending on June 30:

Selected operating indicators 2016 Passenger leg (scheduled and chartered) - in thousands RPK (scheduled) - in millions ASK (scheduled) - in millions Load factor (scheduled)

2015

1,441 5,579 6,775 82.3%

Change

1,257 5,010 6,180 81.1%

14.7% 11.4% 9.6% 1.6%

The data indicates a significant growth in the seats capacity of the Company (ASK), in the passenger legs flown by the Company and the passenger-KM flown (RPK), which means an increase in the number of the Company’s passengers. The load factor increased by 1.6% compared to last year. The following presents, in a graph, the development in operational measures (for the second quarter) over a number of years.

8,000

100% 6,775

7,000 6,000 5,000

5,579

5,199

4,707

6,180

6,164

5,709

90%

5,010

4,000

3,000 2,000

82.4%

84.4%

82.3%

81.1%

80%

1,000

0

70% RPK

ASK

LOAD FACTOR

Additional data

The Company's market share (scheduled and chartered) Flown cargo, in thousand tons Revenue tons kilometers (RTK) - in millions Weighted flying hours (including leased equipment) - in thousands * Aircraft in operation - end of period - number of units Average age of owned fleet at the end of the period - in years

2016 34.2% 22.5 117.4 46.7 43 12.1

2015 32.7% 23.4 124.7 43.0 41 12.7

Change 4.5% (3.9%) (5.8%) 8.6% 2 -0.6

* Weighted flight hours in terms of the Boeing 767. The data above indicates an increase in the Company’s market share, in a market that increased significantly as a result of the significant increase in traffic at Ben Gurion Airport.

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The following presents the passenger traffic at Ben Gurion Airport and the Company’s market share. total traffic (mill. - per passeng. Leg)

El Al & Sun D'or share in total traffic (%)

6.0

40%

33.8% 5.0

31.9%

32.7%

4.1

4.0

34.2% 4.3

4.0

30%

3.3 3.0

20%

2.0 10% 1.0

0.0

0%

* Source: Airport Authority

Legend: Passenger segment - the one-way flight voucher. RPK - revenue passenger kilometer - the number of paid passengers multiplied by the airborne distance. ASK - available seat kilometer - the number of seats offered for sale multiplied by the airborne distance. RTK - revenue ton kilometer - which weights in tons the aircraft cargo for payment multiplied by airborne distance. Passenger load factor (passenger occupancy) - passenger-KM traveled, expressed as a percentage of the available seats-km. Weighted flight hours - the weighted value of the planes: Boeing 767 = 1.00; Boeing 747 = 2.00; Boeing 777 = 1.6; Boeing 737 = 0.6. These weighting values were determined based on the estimated total expenditure of each aircraft type and are consistently used to calculate the weighted time of flight as an indicator of the volume of aviation activity.

B-5

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For a period of six months ending on June 30:

Selected operating indicators 2016 Passenger leg (scheduled and chartered) - in thousands RPK (scheduled) - in millions ASK (scheduled) - in millions Load factor (scheduled) The Company's market share (scheduled and chartered) Flown cargo, in thousand tons Revenue tons kilometers (RTK) - in millions Weighted flying hours (including leased equipment) - in thousands *

2015

2,491 9,963 12,263 81.2% 35.0% 47.6 247.0 85.7

2,214 9,110 11,339 80.3% 33.8% 47.9 255.9 79.4

* Weighted flight hours in terms of the Boeing 767.

14,000

12,263

12,000 10,000

9,023

8,456

11,339

10,901

10,297

100%

9,963 9,110

90%

8,000

6,000 4,000

82.1%

82.8% 80.3%

81.2%

80%

2,000

0

70% RPK

ASK

B-6

LOAD FACTOR

Change 12.5% 9.4% 8.1% 1.1% 3.6% (0.5%) (3.5%) 8.0%

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A3.

Analysis of the business results of the Company

Presented below are the statements of income of the Company, including the turnover rate and the rate of change compared to last year. Also presented are the explanations and the main trends affecting the Company's results in the reporting quarter compared to the previous year.

For a period of three months ending on June 30: 2016 USD % of thousands turnover Operating income

2015 USD % of thousands turnover

Change USD thousands %

537,479

100%

510,642

100%

26,837

5.3%

(413,653)

(77.0%)

(407,895)

(79.9%)

(5,758)

1.4%

Gross profit

123,826

23.0%

102,747

20.1%

21,079

20.5%

Sale expenses

(50,898)

(9.5%)

(48,118)

(9.4%)

(2,780)

5.8%

Management and general expenses

(22,828)

(4.2%)

(22,389)

(4.4%)

(439)

2.0%

1,036

0.2%

(4,830)

(0.9%)

5,866

Profit from ordinary activity

51,136

9.5%

27,410

5.4%

23,726

Financing expenses

(6,066)

(5,551)

(515)

1,592

1,785

(193)

314

0

314

Operating expenses

Other income, net

Financing income Company’s share of the profits of associated companies, net of tax Profit before income tax Income tax Profit for the period

46,976

23,644

23,332

(11,965)

(6,343)

(5,622)

35,011

17,301

17,710

86.6%

Operating income - the operating income increased in the reported period by approximately 5.3% compared to the same period the previous year, while an increase occurred of approximately 7.9% in the field of passenger flights. The increase in income from passengers arose from a substantial increase in the number of the Company’s passengers and the quantity of passenger-km (RPK) that was impacted, inter alia, from the timing of the Passover holiday, which occurred in the second quarter this year, while last year the Passover holiday occurred in the beginning of April, such that the vacations for the Passover holiday occurred in the last week of March. On the other hand, the income was negatively impacted as a result of the continued trend of decline in the flight prices following the impact of the decrease in the oil prices and increase in competition. In the area of cargo, revenue decreased by approximately 14.6%, mainly due to a decrease in yield per tonkm and a decrease in the number ton-kilometers flown. Operating expenses - the operating expenses increased in the reported period by approximately USD 6 million (1.4%) compared to the same period the previous year, primarily as a result of an increase in activity, disruptions manning flights (which began in October 2015 and continue to the date of the publication of the Report) and the need to find alternative solutions in connection with the same, and as a result of an increase in depreciation expenses, arising mainly from an increase in the state of the Company’s aircraft and a change to the estimate of the residual value of the 777 aircrafts, as explained in Note 3b of the Consolidated Financial Statements. The increase in expenses in the amount of approximately USD 32 million was offset from a decrease in the amount of approximately USD 26 million in jet fuel expenses of the Company, as explained below.

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Jet fuel expenses: The Company's jet fuel expenses, including the impact of hedging, declined by USD 26.3 million (approximately 21%) compared to expenses in the same quarter last year as a result of a significant decrease in jet fuel prices, which was partially offset by an increase in aviation fuel consumed due to increased volume of activity of the Company (approximately 9% increase in flying hours). The table below reflects the impact of the jet fuel expenses on the Company’s results, including the impact of hedging transactions (in USD millions): 2016

2015

Difference

Jet fuel expenses for the period (before the effect of hedging)

94.2

114.8

(20.6)

Impact of hedging transactions on the income statement

6.1

11.8

(5.7)

Total jet fuel expenses (including the impact of hedging)

100.3

126.6

(26.3)

For additional details regarding hedging the jet fuel prices, see Section b1(3) below. For additional details for the impact of the derivatives on the financial statements, see Note 4 of the Condensed Financial Statements. Sales expenses - in the sale expenses, an increase occurred in the rate of approximately 5.8% arising mainly from an increase in the distribution expenses due an increase in the circulation of the income compared to the same quarter last year. Management and general expenses - in the management and general expenses, there was no material change compared to the same quarter last year. Other net income - in the reported quarter, the Company recognized other income in the amount of approximately USD 1.0 million for the capital gains from the sale of a 737-700 aircraft. In the same period last year, the Company recognized other net expenses in the amount of approximately USD 4.8 million for an early retirement plan for the Company’s employees. Financing expenses - the net financing expenses amounted to approximately USD 4.5 million compared to approximately USD 3.8 million in the same quarter the previous year. The increase in financing expense arose mainly from exchange rate differentials. Income taxes - the income taxes in the reported quarter amounted to approximately USD 12 million compared to approximately USD 6.3 million in the same quarter last year. The increase arose from an increase in profit before income tax. Profit for the period - the profit before tax in the reported period amounted to approximately USD 47 million (profit after tax of approximately USD 35 million, constituting approximately 6.5% of the turnover) compared to profit before tax of approximately USD 23.6 million in the same quarter the previous year (profit after tax of approximately USD 17.3 million, approximately 3.4% of the turnover).

B-8

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For a period of six months ending on June 30: 2016 USD % of thousands turnover Operating income

2015 USD % of thousands turnover

Change USD thousands %

933,964

100%

930,451

100%

3,513

0.4%

(775,751)

(83.1%)

(775,285)

(83.3%)

(466)

0.1%

Gross profit

158,213

16.9%

155,166

16.7%

3,047

2.0%

Sale expenses

(92,742)

(9.9%)

(92,140)

(9.9%)

(602)

0.7%

Management and general expenses

(44,925)

(4.8%)

(44,904)

(4.8%)

(21)

0.0%

1,353

0.1%

(4,802)

(0.5%)

6,155

21,899

2.3%

13,320

1.4%

8,579

Operating expenses

Other net income (expenses) Profit from ordinary activity Financing expenses Financing income Company’s share of the profits of associated companies, net of tax Profit before income tax Tax benefit (income tax) Profit for the period

(11,215)

(12,832)

1,617

2,068

1,185

883

687

244

443

13,439

1,917

11,522

168

(606)

774

13,607

1,311

12,296

64.4%

Operating income - the operating income increased in the reported period by approximately 0.4% compared to the same period the previous year, while an increase occurred of approximately 2.4% and in the field of cargo, the Company’s income decreased by approximately 12.0%. The main trends that impacted the operating income in the first half of 2016 compared to the first half the previous year are similar in nature to the trends explained in the analysis of the results of the second quarter above (excluding the matter of the timing of the Passover holiday). In addition, the Company’s income for a period of six months was detrimentally impacted following the erosion of the exchange rate of currencies in which the sale transactions of the Company are performed compared to the dollar. Operating expenses The operating expenses increased in the reported period by approximately USD 0.5 million (0.1%) compared to the same period the previous year, primarily as a result of an increase in activity, disruptions manning flights (which began in October 2015 and continue to the date of the publication of the Report) and the need to find alternative solutions in connection with the same, and as a result of an increase in depreciation expenses, arising mainly from an increase in the state of the Company’s aircraft and a change to the estimate of the residual value of the 777 aircrafts, as explained in Note 3b of the Consolidated Financial Statements. The increase in expenses in the amount of approximately USD 62.5 million was offset from a decrease in the amount of approximately USD 62 million in jet fuel expenses of the Company, as explained below.

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The table below reflects the impact of the jet fuel expenses on the Company’s results, including the impact of hedging transactions (in USD millions): 2016

2015

Difference

Jet fuel expenses for the period (before the effect of hedging)

157.5

209.2

(51.7)

Impact of hedging transactions on the income statement

26.1

36.1

(10.0)

Total jet fuel expenses (including the impact of hedging)

183.6

245.3

(61.7)

Sales expenses - no material change occurred in the sale expenses compared to the same period last year. Management and general expenses - in the management and general expenses, there was no material change compared to the same period last year. Financing expenses - the net financing expenses amounted to approximately USD 9.1 million compared to approximately USD 11.6 million in the same period the previous year. The decrease was mainly due to gain on early redemption of a loan performed during the first quarter of 2016, as explained in Note 5.b.2. of the Condensed Financial Statements. Tax benefit - the tax benefit in the reported period amounted to approximately USD 0.2 million, despite the profit recognized in this period, following the reduction of the corporate tax rate in the first quarter of 2016, which led to recognition of income tax on the date of the change, in the amount of approximately USD 3.8 million (see also Note 10 of the Condensed Financial Statements). In the same period the previous year, tax expenses were recorded in the income in the amount of approximately USD 0.6 million. Profit for the period - the profit before tax in the reported period amounted to approximately USD 13.4 million (profit after tax of approximately USD 13.6 million, constituting approximately 1.5% of the turnover) compared to profit before tax of approximately USD 1.9 million in the same period the previous year (profit after tax of approximately USD 1.3 million, approximately 0.1% of the turnover).

A4.

Sector reporting

Regarding the analysis of income and expenses based on sector of activity, see Note 8 of the Condensed Financial Statements.

A5.

Seasonality

The Group's activity is impacted by seasonality and intensifies in peak periods. Great movement of Israeli residents that go overseas takes place mainly in the summer months and holiday seasons, and large movement of tourists entering Israel takes place in the summer months and before Jewish or Christian holidays or vacations in the countries of origin. The reporting quarter was impacted, as stated, from timing of the Passover holiday, which occurred in the second quarter of the year. B-10

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A6. Cash flows

Cash flows for a period of three months ending on June 30, 2016 compared to the same period the previous year are: April-June 2016

2015 USD thousands

Cash flow arising from current operations Cash flows used for investment activities Cash flows used for financing activities Effect of exchange rate fluctuations on cash balances held in foreign currency Increase in cash and cash equivalents

Change USD thousands

107,177 (26,658) (38,363)

78,866 (20,995) (2,315)

28,311 (5,663) (36,048)

(464) 41,692

2,319 57,875

(2,783) (16,183)

Cash flow from current operations In the second quarter of 2016, the Company has a positive cash flow from current activities in the amount of approximately USD 107.2 million compared to positive cash flows from current activities in the amount of approximately USD 78.9 million in the same quarter last year. The increase arose mainly from an increase in profit before tax in the reported period compared to the same period last year and from the cash flow from current activity for the same period being detrimentally impacted (approximately USD 15 million) as a result of payment for hedging transactions that are not charged to profit and loss in the same period.

Development of cash flows from current operations for a period of three months ending on June 30, in the years 2013-2016 (USD millions): 107.2

120 100

84.1

78.9

80

60

47.8

40 20 0 -20 -40

B-11

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Cash flows for investment activities In the second quarter of 2016, the Company invested approximately USD 26.7 million, net, in investment activities. The investment in fixed assets and intangible assets amounted to a total of approximately USD 24.6 million (primarily the purchase of parts and accessories, and advances for 787 aircrafts and their engines). In addition, the Company invested a total of approximately USD 9.8 million in short-term deposits. On the other hand, the Company received consideration from the exercise of a 737-700 aircraft in the amount of approximately USD 7.7 million. In the second quarter of 2015, the Company invested approximately USD 21.0 million, net, in investment activities. The investment in fixed assets and intangible assets amounted to a total of approximately USD 31.7 million (primarily the purchase of 737-900 aircrafts and the purchase of parts and accessories). On the other hand, the Company exercised pledged deposits that were used as securities for hedging transactions of jet fuel in a total of approximately USD 10.6 million.

Cash flows for financing activities: In the second quarter of 2016, the Company used a cash flow in the amount of approximately USD 38.4 million, net, for financing activities, of which the Company repaid loans in the amount of approximately USD 23.1 and paid dividend in the amount of approximately USD 15 million. In the second quarter of 2015, the Company used approximately USD 2.3 million, net, for financing activity. The Company received loans in the amount of approximately USD 15.4 million and increased short-term credit in the amount of approximately USD 7.3 million, and on the other hand, repaid loans in the amount of approximately USD 25.1 million. The cash flows for the period of six months ending on June 30, 2016, compared to the same period the previous year, are: January-June 2016

2015 USD thousands

Cash flow arising from current operations Cash flows used for investment activities Cash flows arising from (used for) financing activities Effect of exchange rate fluctuations on cash balances held in foreign currency Increase in cash and cash equivalents

Change USD thousands

178,787 (83,505)

138,036 (48,792)

40,751 (34,713)

(28,369)

31,057

(59,426)

51 66,964

1,625 121,926

(1,574) (54,962)

Cash flow from current operations In the six months ending on June 30, 2016, the Company had a positive cash flow from current activities in the amount of approximately USD 178.8 million compared to positive cash flows from current activities in the amount of approximately USD 138.0 million in the same quarter last year. The increase arose from an increase in profit before tax of the Company compared to the same period, from the cash flow from current activity for the same period being detrimentally impacted (approximately USD 22 million) as a result of payment for hedging transactions that are not charged to profit and loss in the same period, and from an

B-12

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increase in income in advance during the reported period in comparison with the same period the previous year. Cash flows for investment activities In the six months ending on June 30, 2016, the Company invested approximately USD 83.5 million, net, in investment activities. The investment in fixed assets and intangible assets amounted to a total of approximately USD 93.1 million (primarily the completion of the payments for the purchase of 737-900 aircrafts, advances for 787 aircrafts and their engines, and the purchase of parts and accessories). In addition, the Company invested a total of approximately USD 5.7 million in short-term deposits. On the other hand, the Company received consideration from the exercise of two 737-700 aircrafts in the amount of approximately USD 15.3 million. In the six months ending on June 30, 2015, the Company invested approximately USD 48.8 million, net, in investment activities. The investment in fixed assets and intangible assets amounted to a total of approximately USD 83.5 million (primarily the purchase of 737-900 aircrafts and the purchase of parts and accessories). On the other hand, the Company exercised pledged deposits in a total of approximately USD 34.3 million.

Cash flows for financing activities In the six months ending on June 30, 2016, the Company used a cash flow in the amount of approximately USD 28.4 million, net, in financing activities. In this period, the Company paid loans in the amount of approximately USD 135.4 million and paid dividend in the amount of USD 15 million, and on the other hand, received long-term loans in the amount of approximately USD 123 million for financing three 737-900 aircrafts, which were received during the period. In the six months ending on June 30, 2015, the Company generated approximately USD 31.1 million, net, from financing activities. In this period, the Company paid long-term loans in the amount of approximately USD 73.8 million, and on the other hand, received net loans (less raising expenses) in the amount of approximately USD 85.2 million and short-term credit in the amount of approximately USD 19.7 million.

B-13

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A7.

Financial state, cash balances and working capital of the Company

30.06.2016

31.12.2015

30.06.2016

USD thousands Current assets Non-current assets

Total

525,901

394,281

1,288,636

1,269,868

1,814,537

1,664,149

31.12.2015

USD thousands

Current liabilities Non-current liabilities

915,060

843,075

675,220

626,292

Capital

224,257

194,782

1,814,537

1,664,149

Total

The following are the main changes to the sections of assets, liabilities and capital as of June 30, 2016 compared to December 31, 2015: Current assets: The Company’s current assets as of June 30, 2016 amounted to a total of approximately USD 525.9 million, an increase of approximately USD 131.6 million compared to December 31, 2015. The increase arose mainly from an increase in the cash balances (see the cash flow analysis below) and a seasonal increase in the customers section. Current liabilities: The Company’s current liabilities as of June 30, 2016 amounted to a total of approximately USD 915.1 million. The increase in the total of approximately USD 72.0 million compared to December 31, 2015, arose mainly from a seasonal increase in the income in advance from the sale of plane tickets and an increase in payables arising mainly from an increase in advances from customers, offset in part following a decrease in short-term credit and current maturities and a decrease in the section of derivative financial instruments (see Note 4 of the Condensed Financial Statements). Working capital: As of June 30, 2016, the Company has a working capital deficit in the amount of approximately NIS 389.2 million compared to deficit of approximately USD 448.8 million as of December 31, 2015. It is noted that a material part of the deficit in the working capital does not reflect a short-term cash flow, as explained below. The current ratio of the Company as of June 30, 2016 increased to approximately 57.5% compared to 46.8% as of December 31, 2015. The working capital deficit as of June 30, 2016, includes two essential elements which are included under current liabilities of the Company and are characterized by a cyclical business activities, but the Company does not require sources of cash flow in the short-term to repay them: Deferred income from sale of tickets and frequent flyer points, whose elimination will be done through a provision for future flight services, and a commitment to employees for vacation, which is expected to be paid over several years, but is classified as a short-term liability in accordance with GAAP. Moreover, as mentioned in Note 5.b.3 of the Condensed Financial Statements, a loan of USD 30 million, with an original maturity date in April 2017, is expected to be deployed for a period of approximately 4 years, and they shall be classified, as of the financial statements for the third quarter of 2016, as long-term liabilities. It is noted that the working capital is impacted, inter alia, by seasonality of activity and inter alia, from the timing of the holidays.

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Non-current assets: The non-current assets as of June 30, 2016 amounted to a total of approximately USD 1,288.6 million, an increase of approximately USD 18.8 million compared to the balance thereof as of December 31, 2015, mainly as a result of the absorption of three 737-900 aircrafts as stated in Note 3a of the Condensed Financial Statements, less the current depreciation. Non-current liabilities: The Company’s non-current liabilities as of June 30, 2016 amounted to a total of approximately USD 675.2 million, an increase of approximately USD 48.9 million compared to their balance as of December 31, 2015. The increase arose mainly from the receipt of loans to finance three 737-900 aircrafts (see Note 5.b.1 of the Condensed Financial Statements) and an increase in liabilities for deferred taxes, mainly as a result of the improvement in the fair value of the jet fuel derivatives, which, from an accounting perspective, is designated as hedged instruments, and from profit before tax for the period offset by the decrease in the corporate tax rate. Capital The total capital as of June 30, 2016 amounted to approximately USD 224.3 million. The increase in a total of approximately USD 29.5 million compared to capital as of December 31, 2015 arose mainly from the profit for the period, and from the impact of the derivative instruments of the Company on the capital reserves, in the amount net of tax of approximately USD 35.2, offset by the impact of the liabilities for employee benefits of the capital reserves in an amount net of tax of approximately USD 4.7 million. In addition, the increase in the total capital was offset in part by dividend in the amount of approximately USD 15 million paid in April this year.

Development of the capital as of June 30 (USD millions):

250

224.3

200

145.0

144.3

150

107.3 100

50

0

Material loans and credit limits of the Company: In accordance with the guidelines of the Securities Authority in the matter of “reportable credit event,” the Company has determined that the materiality threshold for detail of material loans is 5% of the total consolidated balance sheet of the Company and 10% of the total loans of the corporation.

B-15

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In accordance with the criteria determined as stated above, in the reported period, there were no material changes in the material loans of the Company as set forth in Appendix A of the Board of Director’s Report as of December 31, 2015. For additional details as to the loans of the Company and its compliance with the financial limitations and covenants, see Note 5 of the Condensed Financial Statements.

B. Exposure to Market Risks and their Management B1.

Qualitative report of exposure to market risks and their management

B1. (1) General - description of the market risks to which the Company is exposed

The following details the market risks to which the Company is exposed: Exposure to changes in the price of jet fuel - jet fuel prices changes, which is a key component of the Company's operating expenses, have a material impact on profitability. The Company believes that at the current level of activity, any change of one US cent per gallon of jet fuel price for a whole year now affects fuel expenses by approximately USD 2.5 million. The Company takes protection measures to reduce the exposure, as set forth in Section b1(3) of the Board of Director’s Report below. Exposure to changes in interest rates - approximately 54% of long-term Company loans are at variable interest rates. Therefore, an increase in the LIBOR interest rate may impact the Company’s profitability. In terms of the current loans, any increase of 1% in the LIBOR interest during an entire year will increase the financing expenses of the Company by approximately USD 3.4 million. Currency exposure - Most of the revenues and expenditures of the Company are the US dollar (the Company's functional currency) excluding payroll expenses, which are mainly shekel and payments local suppliers in Israel. Accordingly, a change in the rate of the shekel against the dollar affects the Company's shekel expenses in dollar terms. The Company believes that at the current level of activity, every 1% addition in the exchange rate of the shekel against the dollar during an entire year, increases the Company's annual expenses by approximately USD 4.5 million. The Company takes protection measures to reduce the exposure, as set forth in Section b1(5) of the Board of Director’s Report below. In addition, the Company has insignificant exposure to the euro and other currencies. Exposure in the long-term lending frameworks - in accordance with the provisions of some of the loan agreements, the Company is required to comply with a minimum ratio between the market value of the aircrafts and the balance of the loans that are secured by the same aircrafts. Additionally, the Company is required to uphold a number of conditions, in the absence of which it may be required to demand immediate payment of the loans. The Company’s exposure to market risks in this regard arises from the changes that occur to the market value of aircrafts in the world. For additional details, see Note 14d of the financial statements as of December 31, 2015.

B1(2) The Company’s policy in the management of market risks, the parties responsible for their management, means of supervision and policy implementation

B-16

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Regarding the Company’s policy in the management of market risks, the parties responsible for their management, means of supervision and policy implementation, see Note 19 of the financial statements as of December 31, 2015.

B1(3) Hedging jet fuel prices

The Company performs financial transactions to protect against changes to the jet fuel prices, in accordance with the policy as explained in Note 19 of the Annual Financial Statements as of December 31, 2015. As of June 30, 2016, the Company had a number of engagements for the purpose of hedging jet fuel prices in a scope estimated at approximately 46% of the expected consumption in the next 12 months. In addition, the Company has hedged approximately 40% of the expected consumption for the period between July and December 2017 and approximately 10% of the expected consumption for the first half of 2018. The net fair value of the total jet fuel hedging instruments as of June 30, 2016 is a positive amount of approximately USD 5.6 million. For details regarding changes that occur in the prices of jet fuel after the report date, see Section 2.e of the Board of Director’s Report below.

B1(4) Hedging interest on loans

As of the Report date, approximately 54% of the balance of the loans received by the Company are with undefined variable interest and approximately 46% of the balance of the loans are with fixed interest for a period of up to about 12 years. Additionally, as of this date, there are no transactions for the protection against the exposure existing in the long-term credit portfolio of the Company following changes to the interest rates. The Company operates in accordance with the policy as explained in Note 19 of the Annual Financial Statements as of December 31, 2015.

B1(5) Hedging exchange rates

The Company performs transactions for hedging the currency exposure existing following changes to the shekel rate against the dollar, in accordance with the policy as explained in Note 19 of the Annual Financial Statements as of December 31, 2015. These transactions are recognized for accounting purposes as hedging transactions. The Company has a number of financial transactions that are intended to protect the Company from a decrease in the exchange rates of the dollar against the shekel by June 2017. The net fair value of the instruments as of June 30, 2016 is a positive amount of approximately USD 0.7 million. For details regarding the changes that occurred in the shekel-dollar exchange rate, see section 3.e of the Board of Director’s Report below.

B-17

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B1(6) Report on the sensitivity analysis

The following is a sensitivity analysis of the fair value of the financial instruments sensitive to changes that may occur in the risk factors to which they are exposed. The sensitivity analysis are performed in accordance with the fair value of the financial instruments as of June 30, 2016.

The following are sensitivity analysis tables for instruments sensitive to changes in the market factors: a)

Sensitivity to changes in the dollar/shekel exchange rate - USD thousand: Profit (loss) from the changes Increase Increase In 10% 4.231 NIS / $

Cash and cash equivalents Shorts term deposits Customers and other receivables Long-term deposits Assets for employee benefits Total financial assets Short-term credit and current maturities Suppliers and service providers

Fair value 3.846 NIS / $

In 5% 4.038 NIS / $

In 5% 3.654 NIS / $

In 10% 3.461 NIS / $

(3,256)

(1,705)

35,812

1,885

3,979

(788)

(413)

8,666

456

963

(2,954)

(1,547)

32,496

1,710

3,611

(64)

(33)

703

37

78

(5,930)

(3,106)

65,227

3,433

7,247

(12,991)

(6,805)

142,904

7,521

15,878

162

85

(1,786)

(94)

(198)

3,553

1,861

(39,082)

(2,057)

(4,342)

75

39

(820)

(43)

(91)

Accounts payable - current Provisions

Profit (loss) from the changes Decrease Decrease

788

413

(8,673)

(456)

(964)

Liabilities for employee benefits - current

7,820

4,096

(86,022)

(4,527)

(9,558)

Credit from bank corporations and others

5

3

(55)

(3)

(6)

4,508

2,361

(49,586)

(2,610)

(5,510)

403

211

(4,437)

(234)

(493)

17,315

9,070

(190,461)

(10,024)

(21,162)

4,323

2,265

(47,557)

(2,503)

(5,284)

Liabilities for employee benefits - noncurrent Accounts payable - non-current Total financial liabilities

Linkage balance sheet exposure due to excess Financial liabilities of financial assets

B-18

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b) Sensitivity of hedging NIS / dollar exchange rate Profit from the Loss from changes changes Increase Increase Decrease Decrease By 10% By 5% Fair value By 5% By 10% In In In In exchange exchange exchange exchange rate rate NIS / $ rate rate 4.231 4.038 3.846 3.654 3.461 Shekel-dollar forward transactions intended for protection

(9,700)

(5,081)

672

5,616

11,855

c) Sensitivity to changes in the euro/dollar exchange rate - USD thousand: Profit (loss) from the changes Increase Increase In 10% In 5% 0.988 0.943 Euro / $ Euro / $ Cash and cash equivalents

Fair value 0.898 Euro / $

Profit (loss) from the changes Decrease Decrease In 5% In 10% 0.853 0.808 Euro / $ Euro / $

(609)

(319)

6,703

353

745

Customers and other receivables

(2,214)

(1,160)

24,354

1,282

2,706

Total financial assets

(2,823)

(1,479)

31,057

1,635

3,451

2,378

1,245

(26,155)

(1,377)

(2,906)

Suppliers and service providers Accounts payable Liabilities for employee benefits - current

22

12

(243)

(13)

(27)

120

63

(1,325)

(70)

(147)

Liabilities for employee benefits - noncurrent Total financial liabilities

63

33

(698)

(37)

(78)

2,584

1,353

(28,421)

(1,496)

(3,158)

Linkage balance sheet exposure due to excess Financial assets over financial liabilities

(240)

(126)

2,636

139

293

d) Sensitivity to changes in the prices of jet fuel over inventory (dollar/gallon) - USD thousands Profit from the changes Increase Increase In 10% In 5% 1.472 1.405 $ / Gallon Total hedging transactions of jet fuel

448

$ / Gallon 224

Fair value 1.339 * $/ Gallon 4,477

Loss from changes Decrease Decrease In 5% In 10% 1.272 1.205 $ / Gallon (224)

* The price of jet fuel based on the weighted average ranges in a period of three months ending on June 30, 2016.

B-19

$ / Gallon (448)

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e) Hedging sensitivity of jet fuel to changes in the prices of jet fuel - in USD thousands: According to the principles of the model, grouping was performed of the jet fuel hedging instruments that respond similarly to market factors, since there was no material loss of information required for understanding the Company’s exposure to the market risks as a result of the grouping. On January 5, 2009, a change of approximately 14% occurred in the prices of jet fuel, and therefore the following sensitivity analysis also includes a change of 15% in the prices of jet fuel. Profit from the changes Increase Increase Increase

Jet fuel hedging transactions recognized as protection

By 15% 1.570 $/ Gallon

By 10% 1.502 $/ Gallon

By 5% 1.433 $/ Gallon

30,952

20,533

10,211

Loss from changes Decrease Decrease Decrease Fair value * 1.365 $/ Gallon

5,564

By 5% 1.297

By 10% 1.229

By 15% 1.160

$ / Gallon

$ / Gallon

$ / Gallon

(10,092)

(20,112)

(30,147)

* Price of jet fuel in the Mediterranean as of June 30, 2016, based on which the fair value of the jet fuel hedging transactions of the Company is calculated.

B-20

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B2. Linkage basis report The following is a linkage basis report on a consolidated basis as of June 30, 2016:

In USD or linked thereto

In Israeli currency NIS

In foreign In Euro currency or linked or linked thereto thereto USD thousands

130,569 76,177 132,717 2,957 -

35,812 8,666 32,496 672 -

6,703 24,354 149 -

6,548 16,681 -

34,847 16,553

179,632 84,843 206,248 3,778 34,847 16,553

14,684 -

108 364,795

703 65,227 143,576

31,206

23,229

21,027 1,178,107 1,197 1,251,731

15,387 21,027 1,178,107 7,583 1,197 65,335 1,814,537

Current liabilities Short-term credit and current maturities Suppliers and service providers Accounts payable Provisions Derivative financial instruments Liabilities for employee benefits Income in advance

(140,563) (83,873) (90,037) (2,694) (4,976) (13,196) -

(1,786) (39,082) (820) (8,673) (86,022) -

(26,155) (243) (1,325) -

(7,927) (2,040) (1,538) -

(404,110)

(142,349) (157,037) (93,140) (11,367) (4,976) (102,081) (404,110)

Non-current liabilities Credit from bank corporations and others Liabilities for employee benefits Accounts payable Deferred taxes Income in advance Equity Total liabilities and equity

(477,691) (21,367) (2,700) (837,097)

(55) (49,586) (4,437) (190,461)

(698) (28,421)

(7,709) (19,214)

(66,601) (44,376) (224,257) (739,344)

(477,746) (79,360) (7,137) (66,601) (44,376) (224,257) (1,814,537)

The excess of assets over liabilities (excess of liabilities over assets)

(472,302)

(46,885)

2,785

4,015

512,387

-

Current assets Cash and cash equivalents Shorts term deposits Customers and other receivables Derivative financial instruments Expenses in advance Inventory Non-current assets Long-term deposits Long-term investments Fixed assets and intangible assets Derivative financial instruments Expenses in advance Assets for employee benefits Total assets

7,583

B-21

Nonfinancial items

Total

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The following is a linkage basis report on a consolidated basis as of June 30, 2015:

In USD or linked thereto

In Israeli currency NIS

In foreign In Euro currency or linked or linked thereto thereto USD thousands

Current assets Cash and cash equivalents Shorts term deposits Customers and other receivables Derivative financial instruments Expenses in advance Inventory

110,412 6,786 143,274 3,422 -

49,677 8,843 20,336 -

6,603 15,752 -

9,915 15,265 -

31,396 20,980

176,607 15,629 194,627 3,422 31,396 20,980

Non-current assets Long-term deposits Long-term investments Fixed assets and intangible assets Expenses in advance Assets for employee benefits Total assets

8,046 271,940

890 73,274 153,020

22,355

25,180

18,708 1,203,689 1,825 1,276,598

8,936 18,708 1,203,689 1,825 73,274 1,749,093

Current liabilities Short-term credit and current maturities Suppliers and service providers Accounts payable Provisions Derivative financial instruments Liabilities for employee benefits Income in advance

(203,935) (88,145) (64,781) (1,795) (15,459) (11,201) -

(7,712) (39,199) (434) (8,760) (599) (86,416) -

(23,550) (312) (1,104) -

(7,531) (16,381) (1,310) -

(370,374)

(211,647) (158,425) (81,908) (10,555) (16,058) (100,031) (370,374)

Non-current liabilities Credit from bank corporations and others Liabilities for employee benefits Derivative financial instruments Accounts payable Deferred taxes Income in advance Equity Total liabilities and equity

(473,180) (26,512) (111) (1,136) (886,255)

(1,949) (49,885) (4,437) (199,391)

(673) (25,639)

(7,643) (32,865)

(26,879) (62,673) (145,017) (604,943)

(475,129) (84,713) (111) (5,573) (26,879) (62,673) (145,017) (1,749,093)

The excess of assets over liabilities (excess of liabilities over assets)

(614,315)

(46,371)

(3,284)

(7,685)

671,655

-

B-22

Nonfinancial items

Total

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The following is a linkage basis report on a consolidated basis as of December 31, 2015: In foreign Euro or currency linked or linked thereto thereto USD thousands

Nonfinancial items

In USD or linked thereto

Israeli currency NIS

53,389 74,298 107,652

50,299 8,543 29,417 1,467

4,401 13,293 -

4,579 11,030 -

19,418 16,495

112,668 82,841 161,392 1,467 19,418 16,495

Non-current assets Long-term deposits Long-term investments Fixed assets and intangible assets Expenses in advance Assets for employee benefits Total assets

10,786 40 246,165

702 66,305 156,733

17,694

15,609

19,370 1,171,454 1,211 1,227,948

11,488 19,370 1,171,454 1,211 66,345 1,664,149

Current liabilities Short-term credit and current maturities Suppliers and service providers Accounts payable Provisions Derivative financial instruments Liabilities for employee benefits Income in advance

(189,547) (67,586) (67,711) (1,941) (39,474) (15,656) -

(3,679) (36,056) (455) (8,537) (87,123) -

(22,546) (167) (1,507) -

(7,736) (1,853) (1,405) -

(290,096)

(193,226) (133,924) (70,186) (10,478) (39,474) (105,691) (290,096)

Non-current liabilities Credit from bank corporations and others Liabilities for employee benefits Derivative financial instruments Accounts payable Deferred taxes Income in advance Equity Total liabilities and equity

(439,037) (20,101) (2,712) (843,765)

(293) (53,612) (4,437) (194,192)

(664) (24,884)

(7,126) (18,120)

(56,183) (42,127) (194,782) (583,188)

(439,330) (81,503) (2,712) (4,437) (56,183) (42,127) (194,782) (1,664,149)

The excess of assets over liabilities (excess of liabilities over assets)

(597,600)

(37,459)

(7,190)

(2,511)

644,760

-

Current assets Cash and cash equivalents Shorts term deposits Customers and other receivables Derivative financial instruments Expenses in advance Inventory

B-23

Total

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C. Aspects of Corporate Governance: Disclosure in the Board of Director’s report regarding the approval process of the financial statements The body responsible for overseeing the Company in connection with the approval of the financial statements is the Company's Board of Directors. A number of committees operate in the Company’s board of directors, as follows: the audit (and remuneration) committee, the committee for the management of market risks, the personnel committee, the financial and budget committee, the balance sheet committee, the security committee, the corporate governance committee, the executive committee, and the government relations and regulation committee. On the approval date of the financial statements, the balance sheet committee (and the committee for the review of financial statements) included four members (the majority of which were independent) as follows: Prof. Yehoshua (Shuki) Shemer, chairman of the committee, Ms. Ruth Dahan (Portnoy), Mr. Pinhas Ginsburg, and Mr. Eyal Haimovsky. For details regarding the experience and education of the members of the board of directors, see Article 26 of Part D of the 2015 Periodic Report. The balance sheet committee convenes for a deep and thorough discussion of the draft of the financial statements in the presence of the auditor. The CEO and CFO present to the members of the committee, in great detail, the financial statements, including the economic data detailed about the performances of the Company in the reporting period. The balance sheet committee examines the material matters in the financial reporting and forms a recommendation for the board of directors of the Company regarding, inter alia, the following matters: (a) estimates and assessments performed in the framework of the financial statements; (b) the internal control related to the financial reporting; (c) integrity and fairness of the disclosure in the financial statements; (d) the accounting policies adopted and the accounting treatment adopted in material matters of the Group; (e) valuations, including the assessments and estimates underlying them, on which date in the financial statements rely. The committee also examines various aspects of risk management and control, both those reflected in the financial statements and those impacting the reliability of the financial statements. When complex or material matters are at stake, special discussions are held of the balance sheet committee regarding the matters at stake, with the participation of the auditor. The Company’s board of directors is the organization that discusses and approves the financial statements after the members of the board of directors receive a draft of the financial statements and recommendations of the committee for the review of financial statements a reasonable time before the meeting. During the meeting of the board of directors in which the financial statements are discussed and approved, the CFO of the Company reviews the main parts of the financial statements in detail and the Company’s accounting policy. Additionally, the CEO of the Company reviewed the ongoing actions of the Company and the impact of this activity on the financial statements of the Company and emphasized material matters. In the meeting of the board of directors in which the financial statements are discussed and approved, the representatives of the Company’s auditor are invited and present, and they typically add clarifications, comments and notes on the financial statements and are available to members of the board of directors for questions and clarifications in connection with the reports before their approval. Finally, the chair of the committee for the review of the financial statements (balance sheet committee) reviews the main recommendations of the committee. B-24

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For the formation of the recommendations for the board of directors, the balance sheet committee convened on August 14, 2016. In the aforesaid meeting, the following members of the committee participated: Prof. Yehoshua Shemer (chairman), Mr. Pinhas Ginsburg, and Ms. Ruth Dahan (Portnoy). Additionally, the meeting was attended by the CEO of the Company, Mr. David Mimon, the CFO, Ms. Dganit Plati, the Company’s secretary, Adv. Ayelet Oren and representatives of the auditor. The balance sheet committee held a discussion regarding the financial statements presented before it, including through addressing questions to members of the management present and the auditing accountant. Additionally, the auditor was asked to present to members of the board his comments, if any, including with regarding the accounting policy adopted and special events raised during the review of the financial statements. Below are details of the procedures that have been taken prior to approval of the financial statements as of June 30, 2016: a)

The draft financial statements were sent for perusal by the members of the committee on August 11, 2016.

b)

The members of the committee are invited to contact the CFO of the Company with any question or clarification requested before the meeting is convened.

c)

During the meeting of the committee, the CFO reviewed the Company’s financial results and presented a comparison between the reported period and the parallel periods and the work plan.

d)

Within its meeting, the committee reviewed the assessments and estimates made in connection with the report for the reported quarter, the completeness and accuracy of the disclosure in the financial reporting for the reported period, the accounting policy adopted and the accounting treatment applied in the material matters of the Company.

e)

The committee discussed the effectiveness of the internal control on the financial reporting and the disclosure in the Company. The actions taken by the Company in order to ensure that their reports are lawfully prepared was presented before the committee.

f)

At the end of the discussion and after it was clarified that the financial statements properly reflect the state of the Company’s business and the results of its operations, the committee recommended to the board of directors that it approve the financial statements.

g)

The recommendations of the committee were transferred in writing to the members of the board of directors on August 14, 2016. The Company’s board of directors is of the opinion that in light of the scope and complexity of the recommendations and the time determined to be reasonable by the board of directors for the transfer of the draft of the financial statements and the recommendations as stated above, they will be transferred for the review of the directors a reasonable time before the discussion by the board of directors.

h)

On August 16, 2016, a discussion was held by the board of directors of the Company in which they reviewed and discussed the financial results of the Company, and the recommendations of the committee for the examination of the financial statements. At the conclusion of the board of directors meeting, the financial statements as of June 30, 2016, prepared on the basis of the IFRS rules, were unanimously approved. In the meeting of the board of directors in which the financial statements were approved, the following members of the board participated: Messrs. Amikam Cohen (chairman), Tamar Moses Borowitz (deputy chairman), Yehuda (Yudi) Levy (deputy chairman), Prof. Yehoshua B-25

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(Shuki) Shemer, Ruth Dahan Portnoy, Eyal Haimovsky, Pinhas Ginsburg, Shlomo Hanel, Sophia Kimerling, and Eli Defes.

B-26

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D. Disclosure in connection with the Financial Reporting of the Corporation: D1. Disclosure as to critical accounting estimates The implementation of the accounting principles by the management upon the preparation of the financial statements at times involves estimates, assumptions and forecasts that impact the amounts of assets and liabilities and the business results reported within the financial statements. Some of the assumptions, estimates and forecasts are critical to the financial state or results of activities reflected in the Group’s financial statements, following the materiality of the matter, the complexity of the calculations or the degree of feasibility of the realization of the uncertain matters. For details regarding the material accounting estimates used by the Company, see Note 2c of the Financial Statements as of December 31, 2015.

D2. Disclosure regarding valuation In accordance with Article 8b(i) of the Securities Regulations (Periodic and Immediate Reports), 57301970, the following are details regarding the valuation of the aircraft fleet that was prepared by the Company as of March 31, 2016:

Work performed

Valuation date

Relevant standards

The assessment of impairment of an investment of the Company's aircraft fleet (29 aircrafts owned in addition to 10 leased aircrafts)

31.3.2016

IAS 36, Impairment of Assets

Fair value Working (fair method value ) USD millions Discounted cash flow (DCF)

830

Value of use (value in use) For El Al

The recoverable amount whichever is higher For El Al

Reduced book cost

1,380

1,380

994

For the full valuation, see the quarterly report as of March 31, 2016, published on May 26, 2016 (reference no.: 2016-01-035079). Since the publication of the overall valuation of the aircraft fleet attached to the Board of Director’s Report for the first quarter of 2016, and until the publication of this Report, no changes occurred that might, in the Company’s assessment, change the conclusion in the valuation whereby no impairment will be performed in the records for the aircrafts at the subject of the valuation. Regarding a change to the residual value of the 777 aircrafts and its impact on the examination of the value of use, see Notes 3b and 3c of the Condensed Financial Statements.

D3. Events after the date of the statement of financial position On August 16, 2016, the Company declared a distribution of dividend in the amount of approximately 14 agoras per share (approximately 3.7 cents as of the date of approval of the Interim Financial Statements), for each ordinary share par value NIS 1 each. The total dividend amount is approximately NIS 69.4 million B-27

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(approximately USD 18.3 million as of the date of approval of the Interim Financial Statements). The effective date for the distribution of dividend is determined to be August 25, 2016, and the dividend payment date is determined to be September 7, 2016. The following are the grounds of the board of directors for approval of the distribution: a) On the basis of the Company’s financial statements as June 30, 2016, the dividend distribution meets the profit test. b) The board of directors is satisfied, after being presented with the data and forecasts by the management and on the basis of the projected cash flow of the Company for the next three years, financing sources available to the Company for payment of all of its existing and expected debts and liabilities and the Company’s liquid cash balances, that the distribution of dividend meets the solvency test in accordance with the Companies Law, 5759-1999, and in the Company’s estimate, there is no reasonable concern that the distribution of dividends as stated will prevent the Company from having the ability of meeting the existing and expected liabilities when they become due and to execute its investment plans, including the acquisition plan. The distribution of dividend is not expected to materially detrimentally impact the Company’s financial statement, including its capital structure, liquidity state and its ability to continue to operate in the existing form. The Company meets and will continue to also meet after the distribution of the dividend its financial covenants vis-a-vis the financing banks.

D4. The matters to which the accountants of the Company called attention in their opinion on the Financial Statements For details of the exposure to class actions against the Company and the Company’s exposure to these class actions, please see Note 6 of the Condensed Financial Statements.

B-28

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E. Additional information: Disclosure regarding changes in the economic environment, implications of the crisis in the capital markets and market risks and special events 1. The international aviation market is affected by the security and political situation, special events, such as the outbreak of epidemics and natural disasters around the world in general and in specific areas in particular, and the economic situation in Israel and the world. Below are changes that occurred in the prices of jet fuel and the exchange rate of the shekel from the end of the quarter and until the date near the publication of the Financial Report as of June 30, 2016: 2. As of the reporting date, the market price of the jet fuel (before fees and supplier profits), weighted in accordance with the markets in which the Company purchases the jet fuel, was approximately 136 cents per gallon, and as of the date near the approval of this Report, this price was approximately 120 cents per gallon, which reflects a decrease of approximately 12%. It should be noted that the expense for the jet fuel constitutes approximately 19% of the Company’s turnover, and therefore changes to the price may have a material impact on its financial results. In parallel, the fair value of the hedging instruments of jet fuel will be determined in accordance with the changes to prices that occurred since the date of the Report and from the conclusion of the settlement for some of the transactions. As of June 30, 2016, the Company had engagements for hedging the prices of jet fuel in a scope estimated at approximately 46% of the expected consumption for the upcoming 12 months. After the date of the Report, the Company performed additional financial transactions for protection against the increase in the price of jet fuel, in accordance with its hedging policy, and as of the date near the publication of this Report, it is hedged in a scope of approximately 48% of the expected consumption for the period as of August 2016 and until July 2017 and 40% for the period from August 2017 and until December 2017, and 10% for the months of January-June of 2018. 3. On the date near the publication of the financial statements, the dollar weakened compared to the shekel at a rate of approximately 1% compared to the date of the Report. The Company has hedging transactions for the shekel-dollar exchange rate (see Section b.1.(5) of the Board of Director’s Report above), the fair value of which may change in accordance with the changes to the exchange rates. It should be noted that the impact on the exchange rates on the business results of the next quarter will be determined in accordance with the exchange rates that actually occurred in the quarter generally and at its end (September 30, 2016).

Amikam Cohen Chairman of the Board

David Mimon CEO

August 16, 2016

B-29

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El Al Israel Airlines Ltd. Condensed Consolidated Financial Statements As of June 30, 2016 (Unaudited)

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El Al Israel Airlines Ltd.

Condensed Consolidated Financial Statements As of June 30, 2016

(Unaudited)

Table of Contents

Page

Review Report by Accountant

C-2

Condensed Consolidated Financial Statements (Unaudited): Condensed Consolidated Statements of Financial Position

C-3 - C-4

Condensed Consolidated Income Statements

C-5

Condensed Consolidated Statements of Comprehensive Income

C-6

Condensed Consolidated Statements of Changes to Equity

C-7 - C-11

Condensed Consolidated Statements of Cash Flows

C-12 - C-13

Notes to the Condensed Consolidated Financial Statements

C-14 - C-29

Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding

Review Report of the Auditor to the Shareholders of

El Al Israel Airlines Ltd. Introduction We have reviewed the attached financial information of El Al Israel Airlines Ltd. (hereinafter: the “Group"), including the condensed consolidated statement of financial position as of June 30, 2016, as well as the condensed consolidated income statements, comprehensive income, changes to equity and cash flow for the periods of three months and six months ending on the same date. The board of directors and management are responsible for the preparation and presentation of financial information for these interim periods, pursuant to International Accounting Standard IAS 34, “Interim Financial Reporting,” and are responsible for the preparation of financial information for these interim periods under Chapter D of the Securities Regulations (Periodic and Immediate Reports), 5730-1970. Our responsibility is to express a conclusion regarding the financial information for these interim periods based on our review. We did not review the financial information for the condensed interim period of consolidated companies whose assets as included in the consolidation constitute approx. 0.4% of the total consolidated assets as of June 30, 2016, and whose income included in the consolidation constitutes about 1% and about 1%, respectively, of the total consolidated income for the periods of six months and three months ending on the same date. Additionally, we have been provided with reports by other accountants of an associated company, the investment in which is approximately USD 14,202,000, as of June 30, 2016, and in which the Group’s share of its results is about USD 686 and 313 thousand, respectively, for the periods of six months and three months ending on the same date. The financial information for the condensed interim periods of the same companies was reviewed by other accountants, whose review reports were provided to us, and our conclusion, inasmuch as it relates to the financial information in respect of the same companies, is based on the review reports prepared by the other accountants. Scope of the Review We conducted our review in accordance with Review Standard No. 1 of the Institute of Certified Public Accountants in Israel, "Review of Financial Information for Interim Periods Prepared by the Entity's Auditor." A review of interim financial information includes making inquiries, particularly with the people responsible for financial and accounting matters, and performing analytic and other review procedures. A review is significantly limited in scope in comparison to an audit conducted in accordance with generally accepted accounting standards in Israel, and therefore does not allow us to reach an assurance that we have become aware of all material issues which may have been identified in an audit. Accordingly, we do not express an audit opinion. Conclusion Based on our review and on the review reports provided by other auditors, nothing has come to our attention which would lead us to believe that the above financial information was not prepared, in all material respects, in accordance with IAS 34. In addition to the contents of the preceding paragraph, based on our review and on the review reports provided by other auditors, nothing has come to our attention which would lead us to believe that the above financial information does not fulfill, in all material respects, the disclosure requirements set forth in Section D of the Securities Regulations (Periodic and Immediate Reports), 57301970. Without qualifying our opinion, we draw attention to Note 6 of the financial statements regarding exposure to certification of a class action against the Company and the Company’s exposure to these class actions. Respectfully, Brightman Almagor Zohar & Co. Certified Public Accountants Member of Deloitte Touche Tohmatsu Limited Tel Aviv, August 16, 2016

C-2

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El Al Israel Airlines Ltd. Condensed Consolidated Statements of Financial Position

As of June 30 2016 2015 USD USD thousands thousands (Unaudited)

As of December 31 2015 USD thousands

Assets Current assets Cash and cash equivalents Shorts term deposits Customers and other receivables Derivative financial instruments Expenses in advance Inventory

179,632 84,843 206,248 3,778 34,847 16,553

176,607 *15,629 **194,627 3,422 *31,396 20,980

112,668 *82,841 161,392 1,467 *19,418 16,495

Total current assets

525,901

442,661

394,281

Non-current assets Long term deposits Long term investments Fixed assets and intangible assets Derivative financial instruments Expenses in advance Assets for employee benefits

15,387 21,027 1,178,107 7,583 1,197 65,335

*8,936 **18,708 **1,203,689 *1,825 73,274

*11,488 *19,370 1,171,454 *1,211 66,345

Total non-current assets

1,288,636

1,306,432

1,269,868

Total assets

1,814,537

1,749,093

1,664,149

*Reclassified, see Note 11 below. **Reclassified, see Note 23b. of the Annual Financial Statements.

The notes to the condensed consolidated financial statements constitute an integral part hereof.

C-3

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El Al Israel Airlines Ltd. Condensed Consolidated Statements of Financial Position

As of June 30 2016 2015 USD USD thousands thousands (Unaudited)

As of December 31 2015 USD thousands

Liabilities and equity Current liabilities Short term credit and current maturities Suppliers and service providers Accounts payable Provisions Derivative financial instruments Liabilities for employee benefits Unearned revenues Total current liabilities

142,349 157,037 93,140 11,367 4,976 102,081 404,110 915,060

211,647 158,425 81,908 10,555 16,058 100,031 370,374 948,998

193,226 133,924 70,186 10,478 39,474 105,691 290,096 843,075

Non-current liabilities Loans from bank corporations and others Liabilities for employee benefits Derivative financial instruments Accounts payable Deferred tax liabilities Unearned revenues Total non-current liabilities

477,746 79,360 7,137 66,601 44,376 675,220

475,129 84,713 111 5,573 26,879 62,673 655,078

439,330 81,503 2,712 4,437 56,183 42,127 626,292

Total liabilities

1,590,280

1,604,076

1,469,367

Equity Share capital Premium and capital reserves Accumulated loss Total equity

155,012 271,440 (202,195) 224,257

155,012 *271,274 (281,269) 145,017

155,012 240,556 (200,786) 194,782

Total liabilities and equity

1,814,537

1,749,093

1,664,149

**Reclassified, see Note 23b. of the Annual Financial Statements.

Amikam Cohen Chairman of the Board

David Maimon CEO

Dganit Palti CFO

Date of approval of the financial statements: Ben Gurion Airport, August 16, 2016

The notes to the condensed consolidated financial statements constitute an integral part hereof.

C-4

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El Al Israel Airlines Ltd. Condensed Consolidated Income Statements

For a period of six months ended On June 30 2016 2015 USD USD thousands thousands (Unaudited) Operating revenues Operating expenses

For a period of three months ended Year ended On June 30 As of December 31 2016 2015 2015 USD USD thousands thousands USD thousands (Unaudited)

933,964 (775,751)

930,451 (775,285)

537,479 (413,653)

510,642 (407,895)

2,054,041 (1,592,844)

Gross profit

158,213

155,166

123,826

102,747

461,197

Sale expenses General and management expenses Other net income (expenses)

(92,742) (44,925) 1,353

(92,140) (44,904) (4,802)

(50,898) (22,828) 1,036

(48,118) (22,389) (4,830)

(194,911) (93,237) (3,282)

(136,314)

(141,846)

(72,690)

(75,337)

(291,430)

21,899

13,320

51,136

27,410

169,767

(11,215) 2,068

(12,832) 1,185

(6,066) 1,592

(5,551) 1,785

(26,820) 821

(9,147)

(11,647)

(4,474)

(3,766)

(25,999)

687

244

314

-

823

13,439

1,917

46,976

23,644

144,591

168

(606)

(11,965)

(6,343)

(38,057)

13,607

1,311

35,011

17,301

106,534

Profit for one ordinary share par value NIS 1 each (Dollars) Earnings per share, basic and diluted

0.03

0.00

0.07

0.03

0.21

The weighted average number of shares (in thousands) used in calculating earnings per share: Basic and diluted

495,719

495,719

495,719

495,719

495,719

Profit (loss) from ordinary activity Financing expenses Financing income Net financing expenses Company’s share of the profits of associated companies, net of tax Profit before income tax Tax benefits (income tax) (see Note 10) Net profit for the period

The notes to the condensed consolidated financial statements constitute an integral part hereof. C-5

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El Al Israel Airlines Ltd. Condensed Consolidated Statements of Comprehensive Income

For a period of six months ended On June 30 2016 2015 USD USD thousands thousands (Unaudited)

Profit for the period

For a period of three months ended Year ended On June 30 As of December 31 2016 2015 2015 USD USD thousands thousands USD thousands (Unaudited)

13,607

1,311

35,011

17,301

106,534

(4,716)

4,185

(2,601)

4,228

(984)

369 29,264

(461) 28,547

(237) 12,637

(13) 18,770

(137) 5,346

5,967

-

6,837

-

(2,672)

30,884

32,271

16,636

22,985

1,553

44,491

33,582

51,647

40,286

108,087

Other comprehensive income: Amounts that will not be classified in the future in the income statement: Profit (loss) for re-measurement of defined benefit, net of tax

Amounts that will be classified in the future in the income statement: Exchange differences on translating foreign currency Profit on hedging cash flows, net of tax Profit (loss) on hedging cash flows - time value, net of tax Other comprehensive period:

income

for

the

Total comprehensive income for the period

The notes to the condensed consolidated financial statements constitute an integral part hereof.

C-6

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El Al Israel Airlines Ltd. Condensed Consolidated Statements of Changes to Equity

For a period of six months ending on June 30, 2016 (unaudited) Transactions Cash with former Cash flows Foreign Recontrolling flows hedging currency measurement of shareholder hedging time value translation defined benefit reserve reserve reserve reserve plans reserve USD USD USD USD thousands thousands thousands thousands USD thousands

Retained ernings (Loss) USD thousands

Total USD thousands

(583)

(200,786)

194,782

369

(4,716)

13,607 -

13,607 30,884

5,967

369

(4,716)

13,607

44,491

-

-

-

-

(15,016)

(15,016)

1,382

3,295

(614)

(5,299)

(202,195)

224,257

Share capital USD thousands

Share premium USD thousands

Balance as of January 1, 2016

155,012

35,554

237,122

(27,882)

(2,672)

(983)

Profit for the period Other comprehensive income (loss)

-

-

-

29,264

5,967

Total comprehensive income (loss) for the period

-

-

-

29,264

Dividend paid (see Note 9)

-

-

-

Total equity as of June 30, 2016

155,012

35,554

237,122

The notes to the condensed consolidated financial statements constitute an integral part hereof.

C-7

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El Al Israel Airlines Ltd. Condensed Consolidated Statements of Changes to Equity (Cont.)

Share capital USD thousands

Share premium USD thousands

For a period of six months ending on June 30, 2015 (unaudited) Transactions Cash Rewith former Cash flows Foreign measurement controlling flows hedging currency of defined Retained shareholder hedging time value translation benefit plans ernings reserve reserve reserve reserve reserve (Loss) USD USD USD USD USD USD thousands thousands thousands thousands thousands thousands

Balance as of January 1, 2015

155,012

28,007

237,122

7,547

(33,228)

(846)

401

(282,580)

111,435

Profit for the period Other comprehensive income (loss)

-

-

-

-

28,547

(461)

4,185

1,311 -

1,311 32,271

Total comprehensive income (loss) for the period

-

-

-

-

28,547

(461)

4,185

1,311

33,582

Expiration of share options

-

7,547

-

(7,547)

-

-

-

-

-

Total equity as of June 30, 2015

155,012

35,554

237,122

-

(4,681)

(1,307)

4,586

(281,269)

145,017

The notes to the condensed consolidated financial statements constitute an integral part hereof.

C-8

Total USD thousands

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El Al Israel Airlines Ltd. Condensed Consolidated Statements of Changes to Equity (Cont.)

For a period of three months ending on June 30, 2016 (unaudited) Transactions Rewith former Cash Cash flows Foreign measurement controlling flows hedging currency of defined shareholder hedging time value translation benefit plans reserve reserve reserve reserve reserve USD USD USD USD thousands thousands thousands USD thousands thousands

Retained ernings (Loss) USD thousands

Total USD thousands

(2,698)

(237,206)

172,610

(237)

(2,601)

35,011 -

35,011 16,636

6,837

(237)

(2,601)

35,011

51,647

3,295

(614)

(5,299)

(202,195)

224,257

Share capital USD thousands

Share premium USD thousands

Balance as of April 1, 2016

155,012

35,554

237,122

(11,255)

(3,542)

(377)

Profit for the period Other comprehensive income (loss)

-

-

-

12,637

6,837

Total comprehensive income (loss) for the period

-

-

-

12,637

Total equity as of June 30, 2016

155,012

35,554

237,122

1,382

The notes to the condensed consolidated financial statements constitute an integral part hereof. C-9

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El Al Israel Airlines Ltd. Condensed Consolidated Statements of Changes to Equity (Cont.)

Share capital USD thousands

For a period of three months ending on June 30, 2015 (unaudited) Transactions Rewith former Cash Foreign measurement controlling flows currency of defined Retained Share shareholder hedging translation benefit plans ernings premium reserve reserve reserve reserve (Loss) USD USD USD USD USD USD thousands thousands thousands thousands thousands thousands

Total USD thousands

Balance as of April 1, 2015

155,012

35,554

237,122

(23,451)

(1,294)

358

(298,570)

104,731

Profit for the period Other comprehensive income (loss)

-

-

-

18,770

(13)

4,228

17,301 -

17,301 22,985

Total comprehensive income (loss) for the period

-

-

-

18,770

(13)

4,228

17,301

40,286

Total equity as of June 30, 2015

155,012

35,554

237,122

(4,681)

(1,307)

4,586

(281,269)

145,017

The notes to the condensed consolidated financial statements constitute an integral part hereof. C - 10

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El Al Israel Airlines Ltd. Condensed Consolidated Statements of Changes to Equity (Cont.)

For the year ending December 31, 2015 Cash flows Rehedging Foreign measuremen Cash flows - time currency t of defined hedging value translatio benefit plans reserve reserve n reserve reserve USD USD thousan USD USD thousands ds thousands thousands

Share capital

Share premium

Transactions with former controlling shareholder reserve

USD thousands

USD thousands

USD thousands

Balance as of January 1, 2015

155,012

28,007

237,122

7,547

(33,228)

-

(846)

Profit for the year Other comprehensive income (loss)

-

-

-

-

5,346

(2,672)

Total comprehensive income (loss) for the year

-

-

-

-

5,346

Expiration of share options

-

7,547

-

(7,547)

-

Dividend paid

-

-

-

-

Total equity as of December 31, 2015

155,012

35,554

237,122

-

Retained ernings (Loss)

Total

Share capital

USD thousands

USD thousands

USD thousands

401

(282,580)

111,435

(137)

(984)

106,534 -

106,534 1,553

(137)

(984)

106,534

108,087

-

-

-

-

-

-

-

-

-

(24,740)

(24,740)

(27,882)

(2,672)

(983)

(583)

(200,786)

194,782

(2,672)

The notes to the condensed consolidated financial statements constitute an integral part hereof.

C - 11

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El Al Israel Airlines Ltd. Condensed Consolidated Statements of Cash Flows

For a period of six months ended On June 30 2016 2015 USD USD thousands thousands (Unaudited)

For a period of three months ended On June 30 2016 2015 USD USD thousands thousands (Unaudited)

13,607

1,311

35,011

17,301

106,534

165,180

136,725

72,166

61,565

164,884

Cash arising from current operations, net

178,787

138,036

107,177

78,866

271,418

Cash flows for investment activities Acquisitions of fixed assets (including general engine repair and payments on account of aircrafts) Consideration from the exercise of fixed assets Investment in intangible assets Change in deposits

(87,812) 15,344 (5,327) (5,710)

(83,077) 308 (408) 34,385*

(21,181) 7,749 (3,419) (9,807)

(31,458) 110 (216) 10,569*

(136,239) 913 (672) (28,139)

Net cash used in investing activities

(83,505)

(48,792)

(26,658)

(20,995)

(164,137)

(367)

(3,876)

-

-

(3,876)

123,000

89,119

-

15,427

104,547

(135,354) (632) (15,016)

(73,845) 19,659 -

(23,149) (198) (15,016)

(25,055) 7,313 -

(125,105) (982) (24,740)

Net cash deriving from (used in) financing activities

(28,369)

31,057

(38,363)

(2,315)

(50,156)

Increase in cash and cash equivalents

66,913

120,301

42,156

55,556

57,125

Balance of cash and cash equivalents at beginning of period

112,668

54,681

137,940

118,732

54,681

Effect of exchange rate fluctuations on cash balances held in foreign currency

51

1,625

(464)

2,319

862

Balance of cash and cash equivalents at end of period

179,632

176,607

179,632

176,607

112,668

Cash flow from current operations Profit for the period Adjustments required to present cash flows from operating activities - Appendix A

Cash flows from (for) financing activities Payment for the costs of raising loans Receipt of loans from bank corporations and others Payment of loans from bank corporations and others Increase (decrease) in short term credit, net Dividend paid

**Reclassified, see Note 23b. of the Annual Financial Statements. The notes to the condensed consolidated financial statements constitute an integral part hereof. C - 12

Year ended As of December 31 2015 USD thousands

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El Al Israel Airlines Ltd. Condensed Consolidated Statements of Cash Flows

For a period of six months ended On June 30 2016 2015 USD USD thousands thousands (Unaudited)

For a period of three months ended Year ended On June 30 As of December 31 2016 2015 2015 USD USD thousands thousands USD thousands (Unaudited)

84,489 (601)

79,295 374

44,494 11,719

39,437 6,253

161,108 37,721

(11,015) (1,152) (1,263) 702

7,926 (199) (21,748)

(10,540) (1,042) (227)

6,639 (48) (15,058)

10,442 (2,043) (28,976)

(51) (728)

(1,625) (830)*

464 (259)

(2,319) (1,342)*

(862) (1,085)

(52,060) (15,415) (58) 46,069 116,263

(56,105)* (6,959) (397) 29,249* 107,744

(9,038) (4,202) (308) 25,426 15,679

(26,465)* (5,407) 709 22,223* 36,943

(12,436) (1,883) 4,088 (8,110) 6,920

165,180

136,725

72,166

61,565

164,884

Interest payments

8,636

7,793

4,342

3,285

15,877

Interest receipts

511

67

106

25

176

Tax payments - advances for excess expenses

153

91

88

8

276

Dividend receipts

682

556

682

-

576

Appendix A - Adjustments required to present cash flows from current activities: Income and expenses not involving cash flows: Depreciation and amortization Net deferred taxes Increase (decrease) in liabilities for employee benefits and provisions Capital gains from sale of fixed assets, net Gain on early redemption of loan (see Note 5) Change in derivatives Expenses (income) from exchange rate differences for cash and cash equivalents Other changes

Changes in sections of assets and liabilities: Increase in customers and other receivables Increase in expenses in advance Decrease (increase) in inventory Increase (decrease) in trade payables Increase in income in advance

Appendix B Payment and receipt of interest, taxes and dividends, classified in cash flow from current operations

**Reclassified, see Note 23b. of the Annual Financial Statements.

The notes to the condensed consolidated financial statements constitute an integral part hereof. C - 13

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El Al Israel Airlines Ltd. Notes to the Condensed Consolidated Financial Statements

Note 1

-

General a.

El Al Israel Airlines is Israel’s leader in most routes to and from Israel. The Company’s main operations involve the transport of passengers and cargo, including baggage and mail, on regular and charter flights between Israel and foreign countries. In addition, the Company is engaged in providing transport and maintenance services at its hub airport, in the sale of duty-free products, and through affiliates in related activities, which primarily involve the production and supply of food for airlines and the management of a number of travel agencies overseas. For information regarding the Group’s sectors of activity, see Note 8. Passenger traffic at Ben Gurion Airport is characterized by strong seasonality. Most of the activity is in the summer months, with the peak being in July-September. The winter months (January-March) are characterized by low activity in passenger traffic. The timing of the Passover holiday also has an impact in terms of seasonality, such that if the Passover holiday occurred later and deeper into the second quarter of the year, these same would be reflected in the scope of activity, and consequently the income of the Company would be shifted more towards the second quarter.

b.

Note 2

-

These condensed financial statements should be read in conjunction with the Company’s annual consolidated financial statements as of December 31, 2015 and for the year ending on the same date and the accompanying notes (hereinafter: the “Annual Financial Statements”).

Significant Accounting Policies: a.

Basis of Preparation of the Condensed Financial Statements The condensed financial statements (hereinafter: the “Interim Financial Statements”) of the Company are prepared in accordance with IAS 34, “Interim Financial Reporting” and in accordance with the provisions of Chapter D of the Securities Regulations (Periodic and Immediate Reports), 5730-1970. In preparing these Interim Financial Statements, the Company applied an accounting policy, presentation rules and calculation methods that are identical to those used in the Annual Financial Statements of the Company for 2015. In accordance with Article 4 of the Periodic and Immediate Reporting Regulations, the Company did not attach separate financial information to these Interim Financial Statements pursuant to Article 38d of the Securities Regulations (Periodic and Immediate Reports), 5730-1970, in light of the negligible impact that these financial statements of the investee companies have on the consolidated financial statements. The criteria used by the Company in this determination is the scope of the data of the subsidiaries from the total assets, income, profit and cash flows of the Company from current operations (less than 5%).

b.

Accounting Considerations and Critical Estimates In the application of the Company’s accounting policies, the Company’s management, in certain cases, was required to exercise broad accounting discretion regarding the estimates and assumptions that were used in the determination of the value of the assets and liabilities in the financial statements. The related estimates and assumptions are based on the past experience and other factors considered to be relevant. The actual results may differ from these estimates. For additional details regarding the critical accounting estimates used by the Company, see Note 2.c of the Annual Financial Statements.

C - 14

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El Al Israel Airlines Ltd. Notes to the Condensed Consolidated Financial Statements Note 3

-

Aircrafts and Flight Equipment a.

Reception of Three 737-900ER Aircrafts During the months of February and March 2016, the Company was delivered three Boeing 737-900ER aircrafts. Upon receipt of the same aircrafts, the Company completed the purchase and absorption of eight aircrafts of this model. To finance the purchase of the aforesaid eight airplanes, the Company engaged with three local banks in loan agreements, as stated in Note 5.b.(1) below.

b.

Change in the Estimate of the Residual Value of the 777 Aircrafts During the second quarter of 2016, in accordance with the indications observed in the market, the Company re-estimated the residential value of the Boeing 777 aircrafts. In the opinion of the Company’s management, this estimate more accurately reflects the expected sale price upon exercise of the aircrafts. Following the change to the estimate of the residual value as stated and in accordance with the accepted price lists, the Company recognizes, as of a period of three months ending on June 30, 2016, additional depreciation expenses in the amount of about USD 2.3 million per quarter.

c.

Testing impairment of fixed assets: Further to Note 9.a.(6) of the Company’s Annual Financial Statements, as of the Interim Financial Statements as of March 31, 2016, the Company considers its aircrafts, tested for impairment, to be a single cash-generating unit, for the reasons listed in the same note of the Annual Financial Statements. As of March 31, 2016, signs of impairment in the Company’s aircraft fleet were identified due to the difference existing between the list price of the Company’s aircraft fleet and their book value, and therefore, the Company estimated the value in use of the aircraft fleet. In the estimation of the value of use, the Company estimates the future cash flows that are expected to arise from ongoing use of the aircrafts and their exercise at the end of the period of use, and reduces them to their current value, through use of a discount rate that reflects the operational risk of the aircraft fleet based on the weighted capitalization rate of the Company. The main assumptions used in the calculation of the value of use as of March 31, 2016, is: (1) The expected contribution from the aircraft fleet is based on the actual results in the first quarter of 2016, the estimate of the results for the second quarter (which retroactively are not materially different from the actual results) and the budget for the second half of the year (less imputed tax), projected forward over the economic life of the vehicle fleet, based on the projected economic parameters in the forecast period. The cash flow from the aircraft fleet of the Company is for a defined and final period of time, by the exit date from the planned service of the existing aircrafts. Due to the fact that the valuation of such use is performed for the Company’s existing aircrafts, and in light of the fact that the replacement of part of the existing aircraft fleet of the Company with model 787 aircrafts is a material investment and out of the course of the Company’s ordinary business, in a manner that will materially change the characteristics of the cash flows expected to arise from the vehicle fleet, including the composition of income and expenses, the cash flows expected to arise from the future aircrafts were not taken into account, including the expected investment in their purchase and absorption. (2) The useful life of the aircrafts is based on the projected exit dates of use of each aircraft, which takes into account, inter alia, the exit dates of the aircrafts as a result of the 787 aircraft procurement plan as stated above. (3) Weighted average cap rate, after tax, of 6.0%, which is equivalent to the discount rate before tax of about 13%. In the assessment conducted by the Company, it was determined that the recoverable amount of the aircraft fleet exceeds its carrying amount in the Company’s financial statements. Accordingly, no impairment provision was recorded. As of June 30, 2016, it was determined that the estimate of the annual contribution of the vehicle fleet is not materially different from the contribution used for the calculation performed as of March 31, 2016, and there was no substantial change in the interests in the market with respect to the same date. In connection with the above in Note 3b, in light of the fact that the decrease in the residential values is significantly lower than the difference between the value in use and the book value of the aircraft fleet, it was determined that there is no need to perform a reassessment of the value of use in excess of the assessment performance as of March 31, 2016, as stated above. Accordingly, during the periods of six and three months ending on June 30, 2016, no impairment provision was recognized for aircrafts. C - 15

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El Al Israel Airlines Ltd. Notes to the Condensed Consolidated Financial Statements Note 3

-

Aircrafts and Flight Equipment (cont.) d.

Extending the lease of 737-800 Aircrafts: In April through July 2016, the Company engaged in agreements to extend the leases of four passenger aircrafts, models 737-800 (marked EKS, EKF, EKT and EKP) for periods between 60 and 86 months, as of August through December 2016. These leases will continue to be handled by the Company as operating leases.

e.

Sale of 737-700 aircraft: On April 3, 2016, an agreement was signed for the sale of a 737-700 aircraft, the Company’s last aircraft of this model, in consideration for about USD 7.7 million. The aircraft was delivered to the purchaser in June, and for the sale and exit from service as stated, the Company recognized profit in the second quarter of 2016 in the amount of about USD 1 million, within the other income section. Regarding the sale of another aircraft of the same model, the consideration for which was received in the first quarter of 2016, see Note 9f of the Annual Financial Statements.

f. Sale of 787-9 Aircraft: In July 2016, after the date of the statement of financial position, the Company signed a letter of intent for the lease of another 787-9 passenger aircraft from a foreign company for a period of 12 years. The aircraft is scheduled to be delivered to the Company in February 2018. The aforesaid transaction is in addition to the Company’s procurement plan, as described in Note 9d of the Annual Financial Statements, based on which the Company is expected to acquire 15 wide-body 787 aircrafts.

C - 16

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El Al Israel Airlines Ltd. Notes to the Condensed Consolidated Financial Statements Note 4

-

Derivative Financial Instruments Changes to the fair value of financial instruments measured at fair value: Listed below are the changes to the fair value of jet fuel hedging transactions and exchange rate hedging transactions of the Company, measured at fair value (level 2), and their impact on the income statement, other comprehensive income and the cash flow of the Company:

Impact on income statement USD thousands

For a period of six months ending on June 30, 2016 (unaudited) Impact on statement The total An increase in the of other effect on the property / decrease in the comprehensive Company's Cash flow for liability (asset decrease / income capital derivatives increase in liabilities) USD USD USD thousands thousands thousands USD thousands (40,719)

Opening balance in the statement of financial position (net) Jet fuel derivatives: Revaluation of transactions that are designated as hedging instruments for accounting purposes Payment of transactions that are designated as hedging instruments for accounting purposes

-

21,644

21,644

-

21,644

(26,106) (26,106)

26,106 47,750

21,644

(26,106) (26,106)

26,106 47,750

-

1,063

1,063

-

1,063

1,006

(1,006)

-

1,006

(1,006)

(582)

-

(582)

-

(582)

Total foreign exchange derivatives

424

57

481

121 1,127

(121) (646)

Total derivatives

(25,682)

47,807

22,125

(24,979)

47,104

Total jet fuel derivatives Exchange rate derivatives: Revaluation of transactions that are designated as hedging instruments for accounting purposes Payment of transactions that are designated as hedging instruments for accounting purposes Revaluation of transactions that are not designated as hedging instruments for accounting purposes* Receipt for transactions that are not designated as hedging instruments for accounting purposes*

6,385

Closing balance in the statement of financial position (net) * Euro-Dollar exchange rate derivative transactions C - 17

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El Al Israel Airlines Ltd. Notes to the Condensed Consolidated Financial Statements Note 4

-

Derivative Financial Instruments (cont.)

Impact on income statement USD thousands

For a period of six months ending on June 30, 2015 (unaudited) Impact on The total An increase in the property statement of other effect on the / decrease in the liability comprehensive Company's Cash flow for (asset decrease / increase in income capital derivatives liabilities) USD USD USD thousands thousands thousands USD thousands (73,117)

Opening balance in the statement of financial position (net) Jet fuel derivatives: Revaluation of transactions that are designated as hedging instruments for accounting purposes Payment of transactions that are designated as hedging instruments for accounting purposes Revaluation of transactions that are not designated as hedging instruments for accounting purposes Payment of transactions that are not designated as hedging instruments for accounting purposes

-

(4,029)

(4,029)

-

(4,029)

(36,355)

36,355

-

(36,355)

36,355

244

-

244

-

244

(36,111)

32,326

(3,785)

(13,934) (50,289)

13,934 46,504

-

4,772

4,772

-

4,772

(1,524)

1,524

-

(1,524)

1,524

414

-

414

-

414

Total foreign exchange derivatives

(1,110)

6,296

5,186

(7,156) (8,680)

7,156 13,866

Total derivatives

(37,221)

38,622

1,401

(58,969)

60,370

Total jet fuel derivatives Exchange rate derivatives: Revaluation of transactions that are designated as hedging instruments for accounting purposes Payment of transactions that are designated as hedging instruments for accounting purposes Revaluation of transactions that are not designated as hedging instruments for accounting purposes Payment of transactions that are not designated as hedging instruments for accounting purposes

(12,747)

Closing balance in the statement of financial position (net)

C - 18

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El Al Israel Airlines Ltd. Notes to the Condensed Consolidated Financial Statements

Note 4

-

Derivative Financial Instruments (cont.)

Impact on income statement USD thousands

For a period of three months ending on June 30, 2016 (Unaudited) Impact on The total An increase in the statement of other effect on the property / decrease in the comprehensive Company's Cash flow for liability (asset decrease / income capital derivatives increase in liabilities) USD USD USD thousands thousands thousands USD thousands (19,807)

Opening balance in the statement of financial position (net) Jet fuel derivatives: Revaluation of transactions that are designated as hedging instruments for accounting purposes Payment of transactions that are designated as hedging instruments for accounting purposes

-

21,092

21,092

-

21,092

(6,126) (6,126)

6,126 27,218

21,092

(6,126) (6,126)

6,126 27,218

-

(814)

(814)

-

(814)

437

(437)

-

437

(437)

225

-

225

-

225

Total foreign exchange derivatives

662

(1,251)

(589)

437

(1,026)

Total derivatives

(5,464)

25,967

20,503

(5,689)

26,192

Total jet fuel derivatives Exchange rate derivatives: Revaluation of transactions that are designated as hedging instruments for accounting purposes Receipt for transactions that are designated as hedging instruments for accounting purposes Revaluation of transactions that are not designated as hedging instruments for accounting purposes* Payment of transactions that are not designated as hedging instruments for accounting purposes*

6,385

Closing balance in the statement of financial position (net) * Euro-Dollar exchange rate derivative transactions

C - 19

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El Al Israel Airlines Ltd. Notes to the Condensed Consolidated Financial Statements Note 4

-

Derivative Financial Instruments (cont.)

Impact on income statement USD thousands

For a period of three months ending on June 30, 2015 (Unaudited) Impact on The total An increase in the property statement of other effect on the / decrease in the liability comprehensive Company's Cash flow for (asset decrease / increase in income capital derivatives liabilities) USD USD USD thousands thousands thousands USD thousands (53,342)

Opening balance in the statement of financial position (net) Jet fuel derivatives: Revaluation of transactions that are designated as hedging instruments for accounting purposes Payment of transactions that are designated as hedging instruments for accounting purposes Revaluation of transactions that are not designated as hedging instruments for accounting purposes Payment of transactions that are not designated as hedging instruments for accounting purposes

-

4,639

4,639

-

4,639

(15,267)

15,267

-

(15,267)

15,267

3,476

-

3,476

-

3,476

(11,791)

19,906

8,115

(6,230) (21,497)

6,230 29,612

-

5,108

5,108

-

5,108

(523)

523

-

(523)

523

2,531

-

2,531

-

2,531

Total foreign exchange derivatives

2,008

5,631

7,639

(2,821) (3,344)

2,821 10,983

Total derivatives

(9,783)

25,537

15,754

(24,841)

40,595

Total jet fuel derivatives Exchange rate derivatives: Revaluation of transactions that are designated as hedging instruments for accounting purposes Payment of transactions that are designated as hedging instruments for accounting purposes Revaluation of transactions that are not designated as hedging instruments for accounting purposes Payment of transactions that are not designated as hedging instruments for accounting purposes

(12,747)

Closing balance in the statement of financial position (net)

C - 20

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El Al Israel Airlines Ltd. Notes to the Condensed Consolidated Financial Statements Note 4

-

Derivative Financial Instruments (cont.)

Impact on income statement USD thousands

For the year ending December 31, 2015 Impact on The total An increase in the property statement of other effect on the / decrease in the liability comprehensive Company's Cash flow for (asset decrease / increase in income capital derivatives liabilities) USD USD USD thousands thousands thousands USD thousands (73,117)

Opening balance in the statement of financial position (net) Jet fuel derivatives: Revaluation of transactions that are designated as hedging instruments for accounting purposes Payment of transactions that are designated as hedging instruments for accounting purposes Revaluation of transactions that are not designated as hedging instruments for accounting purposes Payment of transactions that are not designated as hedging instruments for accounting purposes

-

(65,623)

(65,623)

-

(65,623)

(65,514)

65,514

-

(65,514)

65,514

(5,789)

-

(5,789)

-

(5,789)

(71,303)

(109)

(71,412)

(25,786) (91,300)

25,786 19,888

-

2,207

2,207

-

2,207

(1,321)

1,321

-

(1,321)

1,321

959

-

959

-

959

Total foreign exchange derivatives

(362)

3,528

3,166

(8,023) (9,344)

8,023 12,510

Total derivatives

(71,665)

3,419

(68,246)

(100,644)

32,398

Total jet fuel derivatives Exchange rate derivatives: Revaluation of transactions that are designated as hedging instruments for accounting purposes Payment of transactions that are designated as hedging instruments for accounting purposes Revaluation of transactions that are not designated as hedging instruments for accounting purposes* Payment of transactions that are not designated as hedging instruments for accounting purposes

(40,719)

Closing balance in the statement of financial position (net) * Primarily Euro-Dollar exchange rate derivative transactions C - 21

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El Al Israel Airlines Ltd. Notes to the Condensed Consolidated Financial Statements Note 5

-

Credit from Bank Corporations a.

Ratio of balance of loans to securities: Further to Note 14d of the Annual Financial Statements, as of the date of the statement of financial position, the Company meets the ratio of securities to loans as required in agreements with the lending banks.

b.

c.

Loans for the finance of aircrafts: (1)

To finance the purchase of the three 737-900ER aircrafts as stated in Note 3a above, the Company engaged with three local banks in loan agreements. Each loan is for a total of USD 41 million and will be paid over a period of 12 years. One of the three aforementioned loans is a fixed rate loan, while the other two are at variable interest rates based on LIBOR plus a margin. These loans are used, inter alia, for payment of the loans received to finance the advances for the purchase of the aircrafts (“PDP”) in the amount of approximately USD 72 million.

(2)

On March 16, 2016, the Company repaid a loan in the amount of USD 15.7 million, in lieu of the projected payment of the loan planned for November 2016. For the early payment as stated, the Company recognized, in a period of six months ending on June 30, 2016, profit from early redemption (presented in the financing expenses section) in the amount of approximately USD 1.3 million.

(3)

In July 2016, after the date of the statement of financial position, the Company’s board of directors approved an engagement with a local bank in order to refinance the loan taken to finance the purchase of three 737-800 aircrafts, the projected balance of which, on the payment date, is approximately USD 30 million, and of a loan taken to finance the 777-200 aircrafts, the projected balance of which on the payment date is approximately USD 48 million. The new loans are for a period of four years beyond the payment dates of the existing loans, which are April 2017 and July 2017, respectively. Both loans are variable rate of LIBOR plus a margin.

Fair value of the loans:

Long term dollar loans with fixed interest

As of June 30, 2016 Book value Fair value USD USD thousands thousands

As of December 31, 2015 Book value Fair value USD USD thousands thousands

283,919

258,641

287,741

254,567

The fair value of these loans is based on a calculation of the current value of the cash flows based on the interest rates of 2.06% as of June 30, 2016 and 2.60% as of December 31, 2015, received for the loans with similar characteristics (level 2).

C - 22

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El Al Israel Airlines Ltd. Notes to the Condensed Consolidated Financial Statements Note 6

-

Legal proceedings As of June 30, 2016, legal claims were filed against the Company in the total amount of approximately USD 678 million, and unquantified legal claims. For these claims, the Company recognized provisions in a total amount of approximately USD 11 million. In the opinion of the Company’s management, based on an opinion of its legal counsel, it is not expected that the Company will have exposure to additional loss for the aforesaid claims in excess of the amounts of the provisions included in the financial statements. The following describes the material changes that occurred in the reporting period with respect to legal proceedings against the Company, further to Note 16b of the Annual Financial Statements: a.

Further to Note 16b(4) of the Annual Financial Statements, regarding a motion to certify a class action (the “Motion”), filed against the Company on the matter of the presentation of the cancellation and change terms of a transaction upon purchase on the website, it is noted that the Jerusalem District Court certified the filing of the claim as a class action of March 23, 2016. The Company filed a motion for leave to appeal, which was denied on July 11, 2016.According to the decision, the class of plaintiffs was classified as purchasers of plane tickets through the Company’s website only, who did not receive information regarding a change or cancellation of plane tickets, as required under the law and regulations, who actually requested to change or cancel the plane tickets purchased, and the Company did not allow them to do so or collected payment from them for the same, of which they were not aware in advance and that is not considered a reasonable service or cancellation fee. For this claim, the Company recognized a provision, based on the estimate of the management and based on an opinion by its legal counsel.

b.

In April 2016, the Company received, at its offices, a motion to certify a class action filed against the Company in the Jerusalem District Court (the “Motion”). The main claims in the Motion are that the Company does not update the customers contacting it by phone for the purchase of plane tickets as to all of the details required under the Consumer Protection law, 5741-1981 (the “Law”) including the full cancellation and/or change conditions of the plane tickets and the conditions of a remote sale transaction. The applicant defined the class of plaintiffs for which the Motion was filed as follows: (a) any person who purchased a plane ticket through the call center and was not updated, orally or in writing, of the material conditions of the transaction, payment conditions, cancellation conditions and additional conditions, in the seven years preceding filing the Motion and until a date of a ruling therein; (b) any person who purchased a plane ticket through the call center, and was not updated of the information listed above and contacted the Company with a request to cancel or change the plane ticket or its terms, but who the Company did not allow to do so or collected financial payment therefrom, of which the purchaser was not updated orally upon the execution or the transaction or thereafter in writing, in the seven years preceding the filing of the Motion and until a date of a ruling therein. The Motion lists a personal amount of NIS 987 and a total amount for all class members of NIS 105 million. At this preliminary stage, it is impossible to evaluate the chances that the motion will be granted.

c.

In May 2016, the Company received, at its offices, a motion to certify a class action filed against the Company in the Central District Court (the “Motion”). The Motion was filed by two passengers who purchased duty-free products during their flights through the Company. According to the claim in the Motion, the prices of the duty-free products, which the Company sells on its aircrafts and website, through ordering in advance, while the payment of the products takes place on the aircraft, is presented in the USD currency and not Israeli currency, and the conversion is performed based on an exchange rate that is updated once per week and not based on the exchange rate known on the trade date in the foreign currency preceding the purchase date. At this preliminary stage, it is impossible to evaluate the chances that the motion will be granted.

d.

In May 2016, the Company received, at its offices, a motion to certify a class action filed against the Company in the Jerusalem District Court (the “Motion”). The Motion was filed by a passenger who purchased a food product from the Company’s Fly&Buy duty-free. According to the claim in the Motion, the Company presents the duty-free products that it sells in a catalog, and presents that the food products are kosher, although the products do not bear any kosher certification. The Motion also claimed that the products do not include the text as required under the Public Health Regulations (Food) (Nutritional Marking), 5753-1993, and the Consumer Protection Order (Marking of Goods), 5733-1983. The Motion lists a personal amount of NIS 73 and a total amount for all class members of approximately NIS 3.1 million. At this preliminary stage, it is impossible to evaluate the chances that the motion will be granted.

C - 23

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El Al Israel Airlines Ltd. Notes to the Condensed Consolidated Financial Statements Note 6

-

Legal Proceedings (cont.) e.

Further to Note 16b(11) of the Annual Financial Statements regarding a motion to certify a class action filed to the Tel Aviv District Court against the Company and against Israir Airlines and Tourism Ltd., Israir Charter (1994) Ltd. and Arkia Israeli Airlines Ltd. (the “Motion”) on behalf of any passengers of the airlines as of August 16, 2012, whose flight departure times were delayed for two hours or more and/or whose flights were cancelled and whose departure times of their alternate flights was delayed for two or more hours from the original departure time and that were not provided with assistance services as stated in the Airline Services Law, 5772-2012 (the “Class”). It is noted that on May 1, 2016, the Court certified the Agreed Motion to Dismiss with respect to the Company without ordering expenses for any of the parties.

f.

Further to the conditions of Note 16b(16) of the Annual Financial Statements regarding a claim filed against the Company in February 2013 in the Regional Tel Aviv Labor Court by 130 security employees, with the claim in the original statement of claim whereby they were/are employed by the Company as assistant security officers sent from time to time to various destinations as needed, to perform flight security shifts and the plaintiffs’ demand from the Court for a declarative remedy based on which it will be determined that the collective employment agreement that regulates the rights of the employees of the Company applies to the plaintiffs and that they should be awarded financial remedies for various salary components. On April 11, 2016, the Company received an amended statement of claim based on which, inter alia, the amount of the claim was quantified in the amount of about NIS 86 million, and the components of the claim were updated and the number of plaintiffs is now 126. For this claim, the Company recognized a provision, based on the estimate of the management and based on an opinion by its legal counsel.

g.

Further to Note 16b(17) of the Annual Financial Statements regarding an amended statement of claim filed by the Ministry of Finance against the Company to the Lod Central District Court in the amount of approximately NIS 125 million with respect to the overdeposit as a result of margins from investments in pension funds in July 2016, after the date of the statement of financial position, the Company filed a statement of defense in the claim. Additionally, regarding the request of an entity known as the “Working Committee of El Al Employees” to join the claim of the Ministry of Finance as a defendant and the request of the employee’s union and General Labor Union in August 2016, after the date of the statement of financial position, the Court decided, with the consent of the parties, to deny the request of the Working Committee to join and to accept the request to join by the employee’s union and General Labor Union the claim as formal defendants. The Court held within its decision that the Workers’ Union and General Labor Union may not make claims regarding the alleged eligibility to funds against the Company within the claim.

h.

In August 2016, after the date of the statement of financial position, the Company received, at its offices, a motion to certify a class action filed against the Company in the Central District Court (the “Motion”). The main claims in the Motion are that the Company publishes, markets and sells plane tickets based on the flight schedule that it publishes, while at the outset, it does not have enough pilots or captains to carry out the aforesaid flight schedule, and the same is deceptive to the public or at least deceives people into purchase tickets for flights when the Company is aware that some of the flights will not be held on the scheduled time or will be cancelled or delayed significantly. It was further claimed in the Motion that the Company’s flight schedule increased and was expanded while the number of pilots, specifically captains, employed in its service did not increase in a manner that would be able to support and meet the flight schedule, as sold to the public, and that the Company did not notify the public of ticket purchasers in advance, and even refused to compensate the purchasers of tickets who were harmed. In the aforesaid motion, the Class was defined as those purchasing plane tickets from the Company in the seven years preceding the date on which the Motion was filed for a certain departure date, as published and marketed by the Company, while in reality the flight departed with a delay in excess of two hours from the scheduled flight time, due to a lack of pilots, and who did not receive compensation from the Company. The scope of the damage estimated in the Motion for the entire Class is in the amount of “tens of millions of shekels.” The Company is studying the Motion and will file its response as required. At this preliminary stage, it is impossible to evaluate the chances that the motion will be granted. C - 24

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El Al Israel Airlines Ltd. Notes to the Condensed Consolidated Financial Statements Note 7

-

Liabilities for employee benefits During the second quarter of 2016, there was a substantial decrease in the rates of yield to maturity of high quality corporate bonds both in the United States and England, on which the actuarial calculations are based for the calculation of obligations, compared to the yield rates that prevailed at the time of the Company’s Annual Financial Statements. In light of the significant decrease as stated, the Company updated, in these Interim Financial Statements, the discount rate used to calculate the commitment, which led to an increase in the liability value for the pension plans in the financial statements, against loss charged to other comprehensive income (capital reserve) in the amount of approximately USD 4.3 million (before tax effect). It is noted that the discount rate used for calculation of the actuarial obligations in Israel, based on the yield to maturity rates of the high quality corporate bonds in Israel did not change materially, and was therefore not updated.

Note 8

-

Sector Reporting a.

General: Operating segments are identified on the basis of internal reports, which are reviewed regularly by the main operating decision maker of the Company for the allocation of resources and the preparation of operating sector performances, as follows (the main operating decision maker of the Company does not receive reports regarding the measurement of the sector’s assets and therefore the same information is not included in the sector report): Sector A - activities of passenger airlines including income (without deducting discounts) from the transport of passengers, including luggage, flying cargo in passenger aircrafts, flying mail and the contribution from the sale of duty-free products. Sector B - total cargo aircraft operations, including income from air transport of cargo. In the area of activity, the Company offers transport services of cargo through cargo plans (at times, through leased plans by their crews as well - “wet leases”) from Israel to destinations abroad and from overseas to Israel. The Company’s other activities include income from the Sun d’Or subsidiary, income from providing maintenance services to foreign entities, and services and additional income such as the lease of equipment, membership fees of passenger clubs, loading and unloading services, and more.

C - 25

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El Al Israel Airlines Ltd. Notes to the Condensed Consolidated Financial Statements Note 8

-

Sector Reporting (cont.) b.

Analysis of Income and Expenses Based on Sector of Activity: For a period of six months ending on June 30, 2016 Passenger Cargo Adjustme airlines plane Other nts Total USD USD USD USD USD thousands thousands thousands thousands thousands (Unaudited) Income: Income from external customers Inter-sector income Total sector revenue Sector’s results Unallocated expenses

848,792* 848,792

34,898 34,898

19,799 22,920 42,719

30,475 (22,920) 7,555

933,964 933,964

133,317

(3,632)

17,938

-

147,623 (125,724)

Operating Profit Financing expenses Financing income Company’s share of the profits of associated companies, net of tax

21,899 (11,215) 2,068

Profit before income tax

13,439

687

* Includes revenue from cargo and mail in the belly of a passenger aircraft in the amount of approximately USD 41,919 thousand. For a period of six months ending on June 30, 2015 Passenger Cargo Adjustme airlines plane Other nts Total USD USD USD USD USD thousands thousands thousands thousands thousands (Unaudited) Income: Income from external customers Inter-sector income

842,149* -

39,198 -

23,534 17,861

25,570 (17,861)

930,451 -

Total sector revenue

842,149

39,198

41,395

7,709

930,451

Sector’s results Unallocated expenses

96,747

(1,719)

21,603

-

116,631 (103,311)

Operating Profit Financing expenses Financing income The Company’s share of the profits of associated companies

13,320 (12,832) 1,185

Profit before income tax

1,917

244

* Includes revenue from cargo and mail in the belly of a passenger aircraft in the amount of approximately USD 48,266 thousand.

C - 26

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El Al Israel Airlines Ltd. Notes to the Condensed Consolidated Financial Statements Note 8

-

Sector Reporting (cont.) b.

Analysis of Income and Expenses Based on Sector of Activity (Cont.) For a period of three months ending on June 30, 2016 Passenger Cargo Adjustme airlines plane Other nts Total USD USD USD USD USD thousands thousands thousands thousands thousands (Unaudited) Income: Income from external customers Inter-sector income Total sector revenue Sector’s results Unallocated expenses

492,547* 492,547

15,066 15,066

10,388 16,468 26,856

19,478 (16,468) 3,010

537,479 537,479

102,847

(1,132)

11,358

-

113,073 (61,937)

Operating Profit Financing expenses Financing income Company’s share of the profits of associated companies, net of tax

51,136 (6,066) 1,592

Profit before income tax

46,976

314

* Includes revenue from cargo and mail in the belly of a passenger aircraft in the amount of approximately USD 20,420 thousand. For a period of three months ending on June 30, 2015 Passenger Cargo Adjustme airlines plane Other nts Total USD USD USD USD USD thousands thousands thousands thousands thousands (Unaudited) Income: Income from external customers Inter-sector income

463,160* -

19,660 -

11,021 12,511

16,801 (12,511)

510,642 -

Total sector revenue

463,160

19,660

23,532

4,290

510,642

Sector’s results Unallocated expenses

67,979

(823)

12,105

-

79,261 (51,851)

Operating Profit Financing expenses Financing income

27,410 (5,551) 1,785

Profit before income tax

23,644

* Includes revenue from cargo and mail in the belly of a passenger aircraft in the amount of approximately USD 22,283 thousand.

C - 27

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El Al Israel Airlines Ltd. Notes to the Condensed Consolidated Financial Statements Note 8

-

Sector Reporting (cont.) b.

Analysis of Income and Expenses Based on Sector of Activity (Cont.)

Passenger airlines USD thousands

For the year ending December 31, 2015 Cargo Adjustme plane Other nts USD USD USD thousands thousands thousands

Total USD thousands

Income: Income from external customers Inter-sector income

1,865,271* -

71,386 -

45,268 50,291

72,116 (50,291)

2,054,041 -

Total sector revenue

1,865,271

71,386

95,559

21,825

2,054,041

Sector’s results Unallocated expenses

347,964

(1,832)

47,526

-

393,658 (223,891)

Operating Profit Financing expenses Financing income Company’s share of the profits of associated companies, net of tax

169,767 (26,820) 821

Profit before income tax

144,591

823

* Includes revenue from cargo and mail in the belly of a passenger aircraft in the amount of approximately USD 94,097 thousand.

Note 9

-

Dividend On March 23, 2016, the Company declared a distribution of dividend in the amount of approximately 11.7 agoras per share (about 3 cents) for each ordinary share par value NIS 1 each. The total dividend amount is approximately NIS 57.8 (approximately USD 15.0 million). The effective date for the distribution of dividend is determined to be March 31, 2016. The dividend was actually paid on April 13, 2016. Regarding dividend declared after the date of the statement of financial position, see Note 13 below.

Note 10

-

Income tax At the beginning of January 2016, the Law to Amend the Income Tax Ordinance was published, which sets forth that the corporate tax rate will be reduced to a rate of 25% (instead of 26.5%) as of 2016. As a result of the same, in a period of six months ending on June 30, 2016, the Company recognized a decrease in tax liabilities of the Company in the amount of approximately USD 3,815,000 against income recognized in the section of tax benefits in the income statement. In addition, the amount of deferred tax assets attributable to the Company's capital funds (debit) decreased by approximately USD 635 thousand (against loss recognized in the statement of other comprehensive income and the capital of the Company). As a result of the same, the (net) liabilities for deferred taxes in the statement of financial position decreased by a net amount of approximately USD 3,180,000, attributed to a change in the tax rate.

C - 28

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El Al Israel Airlines Ltd. Notes to the Condensed Consolidated Financial Statements Note 11

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Reclassification In these Interim Financial Statements, the Company reclassified, in the statement of financial position as of June 30, 2015 and December 31, 2015, amounts in the amount of approximately USD 1.5 million and USD 6.3 million, respectively, which were deposited in deposits as part of its aircraft lease agreements to the “short term deposits” section from the “expenses in advance” section (within current assets), due to the fact that the funds in these deposits are returned to the Company at the end of the lease term. In addition, the Company reclassified, for the same periods, a total of approximately USD 8 million and USD 10.8 million, respectively, to the section of “long term deposits” from the section of “expenses in advance” (within non-current assets). In addition, in the Statements of Financial Position as of December 31, 2015, the Company classified a total of approximately USD 0.7 million in the same section from the “long term investments” section.

Note 12

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Transactions with interested parties and affiliates a.

On April 28, 2016, the special general meeting of the Company’s shareholders approved the following resolutions: (1)

(2)

b.

Update of the employment terms of Mr. David Maimon, CEO of the Company, as follows: -

Increasing the gross monthly wages of the CEO to a total of NIS 130,000, retroactively as of January 1, 2016.

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Amendment of the remuneration rate that was deferred to long term with respect to the CEO such that it is reduced from 45% and amounts to 30%, similar to the other senior officers of the Company.

Payment of a one-time grant to CPA Nimrod Borowitz (“Nimrod”), the Head of Business Development, Long Term Planning and Acquisition of the Company, in the amount of NIS 160,000. Nimrod is the son of David Borowitz (the husband of Ms. Tamar Moses Borowitz, the deputy chairman of the Company’s board of directors and one of the controlling shareholders of Knafayim, the Company’s controlling shareholder).

In May 2016, the Company’s audit committee and board of directors approved the extension of the Company’s engagement with Maman-Cargo Terminals and Handling Ltd. (hereinafter: “Maman”) in a framework agreement (hereinafter: the “Framework Agreement”), signed on February 3, 2010, for an additional term that will retroactively commence as of April 1, 2015, until December 31, 2019, under improved commercial terms. The Framework Agreement set forth the contract terms with respect to the terminal services provided to the Company by Maman, including, inter alia, cargo handling, transport of cargo and storage of cargo. According to the Framework Agreement and pursuant to approval by the shareholders' meeting of Maman from August 1, 2016, after the date of the statement of financial position, the exercise term of the options allocated by Maman to the Company, exercisable into ordinary shares of Maman at a rate of approximately 10% of the issued share capital of Maman on a fully diluted basis, until December 31, 2018. It is noted that the impact of the update to the option terms on the Company’s financial statements is immaterial. It is further noted that the engagement was classified and approved as an “extraordinary transaction.”

Note 13

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Events after the Date of the statement of financial position On August 16, 2016, the Company declared a distribution of dividend in the amount of approximately 14 agoras per share (about 3.7 cents as of the date of approval of the Interim Financial Statements), for each ordinary share par value NIS 1 each. The total dividend amount is approximately NIS 69.4 million (about USD 18.3 million as of the date of approval of the Interim Financial Statements). The effective date for the distribution of dividend is determined to be August 25, 2016, and the dividend payment date is determined to be September 7, 2016.

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