I feel the need to weigh in here as I know the OP well and I have been helping him do the research on this issue.
If anything here is despicable it's taking advantage of a companys error.
I certainly hope they'd prioritze their customers when trying to rebook.
Just be grateful they offered to rebook at all, AFAIK they don't have to (just refund).
First off in regards to the "taking advantage of a company's error" statement, I hope you are joking. By virtue of the fact of being on these forums and being a significant poster to these forums you are seeking out deals yourself the site is called dansdeals.com not dansjustlookbutdonttakeadvantageofthesedeals.com (plus that would be a terribly long url). In a free market society, such as the one we live in prices are set by those who are selling goods and services and it is up to those people to ensure their accuracy. In the event of the El Al price mistake, they contracted out the price setting to a third party who incorrectly posted the prices, consumers than took advantage of these prices at what would appear to be El Al's expense, however, I am quite certain that El Al did not roll over on this mistake and took the appropriate actions necessary to recoup most of these loses from that third party's negligence. Most of us on these forums seek out deals on a daily basis, most of which are prices that are legitimately set, however, from time to time most of take find price mistakes and will take advantage of them on a YMMV basis. A case in point is the United (I think it was them) points deal for 4/8 miles on any flight connecting through I think it was Hong Kong. In this instance, the airline claimed foul and cancelled the tickets because of the error. People complained and the US DOT agreed with the airline stating that the error was one that should not be honored, giving an explanation that was justifiable under the definition of the law. In the case of the El Al price mistake, the law pretty much states that when an error is made in pricing, it MUST be honored as if it were a regular ticket purchased without the mistake. As the audience in this forum is predominantly Jewish (myself included) and the airline is perceived to be owned by Jews, being the Israeli national airline, that taking advantage of this deal is despicable, reprehensible, disgusting, etc., however, these same people would have no problem taking advantage of a deal if it were not a "Jewish" company, something which I think is even worse and is, I would even go so far as to state, a chilul Hashem. Being on this forum means one thing you are looking for a deal, and I believe Dan has done an excellent job with providing us these deals both on his website and within these forums. In a free market society you must always make sure that the prices you set are accurate, it is your responsibility, if you contract it out you are at the whim of someone else, if they make a mistake then only you are to blame, not the customer. Seriously, if you are a true competitive shopper then you have definitely price matched some time in your life, now is that fair? To you yes it is because it is the policy of the store to do so, but do you know if the store is losing money, no you probably don't and don't care either because it's policy. In this case, El Al operates in the US meaning they have to abide by US DOT laws, that being said someone screwed up and they must follow the law, it sucks but it's reality.
In terms of rebooking priority, in past experience with another airline (Air Canada), I thought priority is based on fare class paid when rebooking for flights affected by weather. Unless the policy has changed, the policy that I experienced was that priority first goes to prestige frequent flyer members of that airline and within each frequent flyer level it's in priority of where you stand on the standby list. It did not matter how much was paid for the flight. In my case, I was flying on a reward ticket (YYZ-LGA), someone I was talking to was flying last minute at an expense of $1500 for the O/W ticket, both of us had not status with the airline, as I was on an earlier cancelled flight I had priority over her regardless of how much she paid. In this case, El Al by law was to honor the tickets as if they were purchased without the error and as such priority should go in order of first come first served often in order of flights cancelled, however this is based on past experience and my opinion.
And in regards to rebooking vs. refund, AFAIK you're wrong. El Al's own contract of carriage clearly states that rebooking on the next available flight is one of the options that is to be offered in the event of cancellation. They also state that if possible the trip will match the same length of stay as originally booked. In the case of the OPs parents, they were told that the CS rep's manager told the CS reps that these tickets are not to be treated as standard fare class tickets. This in it of itself is in clear violation of the US DOT laws.