China plans take-over of HNA, sell-off of airline assets

Hainan-based conglomerate HNA holds a 20% stake in Virgin Australia and owns troubled carrier Hong Kong Airlines.

By Businessweek , February 20 2020
China plans take-over of HNA, sell-off of airline assets

China plans to take over troubled conglomerate HNA Group and sell off its airline assets, the most dramatic step to date by the state to contain the deepening economic damage from the deadly coronavirus epidemic.

The government of Hainan, the southern island province where HNA is based, is in talks to seize control of the group after the contagion hurt its ability to meet financial obligations, according to people familiar with the plans.

HNA Aviation, the largest private operator of airlines in China, shot to global prominence between 2016 and 2017 after a debt-fueled acquisition spree, becoming for a time the leading shareholder of iconic companies such as Hilton and Deutsche Bank, while paying top dollar for properties from Manhattan to Hong Kong.

HNA also holds a 20% stake in Virgin Australia, which has grown from an initial 13% stake purchased in May 2016 as a US$114m investment in Virgin Australia, in what Virgin's then-CEO John Borghetti described as "a strategically important alliance" in line with Virgin's ambitions to tap into the surging Chinese travel market, including flights from Australia to Hong Kong and the mainland.

Those plans unwound earlier this month when Virgin announced it was ending flights to Hong Kong, citing "the recent civil unrest and growing concerns over the coronavirus outbreak in the greater region," said Virgin Australia CCO John MacLeod. "These recent factors demonstrate that Hong Kong is no longer a commercially viable route for us to continue operating."

China's 'big three' the likely buyers

Under the emerging plan, China would sell the bulk of HNA’s airline assets to the country’s three biggest carriers – Air China, China Southern and China Eastern – according to the people. Discussions with the airlines are continuing, they said.

An announcement could be made as soon as Thursday, though talks could drag on or fall apart, the people said, asking not to be identified as the discussions are confidential.

A representative for HNA couldn’t immediately comment. Calls and messages to Hainan government officials and press officers at the three state-run airlines weren’t immediately returned after regular business hours in China.

China is under growing strain from the shutdowns imposed to curb the coronavirus, which has killed more than 2,000.

As President Xi Jinping seeks to prevent the short-term economic pain from turning into a slump that outlasts the contagion, his government is considering direct cash infusions or mergers to stabilize the hobbled airline industry, while the People’s Bank of China said it will work on supporting domestic consumption. A takeover of a high-profile corporate would take those efforts to a new level.

Flying too high

HNA has for years been struggling with debts that once climbed to almost ¥600 billion (US$86 billion) as well as soaring borrowing costs. While its total debt fell to ¥525.6 billion yuan as of mid-2019, its cash pile shrank at a much faster pace, to ¥50.4 billion yuan, the smallest amount based on semiannual figures stretching back to 2015.

In an attempt to stabilize the financial situation, HNA has been looking to divest assets including plane lessor Avolon Holdings, which is worth about US$8.5 billion, as well as Swiss aircraft-maintenance firm SR Technics and container-leasing business Seaco, people familiar with the matter have said.

HNA has been slimming down after a US$40 billion buying binge left it with one of the highest levels of corporate debt in China.

In the past year, the group has been returning to its aviation roots, culminating in a November announcement to divide its businesses into airlines, aviation leasing and airports, with the rest being lumped under its “non-aviation asset management” unit.

But its focus on aviation and tourism backfired as the coronavirus epidemic led to an unprecedented drop in flights in and out of China.

Coronavirus shock-wave

“HNA is, even by Chinese standards, a sprawling and indebted conglomerate, and the collapse in Chinese airline activity due to the outbreak of Covid-19 has apparently pushed it to effective bankruptcy,” London-based Agency Partners analysts led by Nick Cunningham wrote in a note after Bloomberg’s report.

China’s economy was likely running at just 40%-50% capacity last week, according to a Bloomberg Economics report, after efforts to contain the epidemic closed stores, brought factories to a halt and triggered a virtual shutdown of the airline industry. Employers have encouraged people to stay home, shopping malls and restaurants are empty, and amusement parks and theaters are closed.

The impact on business has been spreading around the world, disrupting supply chains of the world’s largest carmakers and hitting sales at companies from Apple to Burberry Group and Nike. Apple this week said it doesn’t expect to meet its revenue outlook this quarter, joining the growing number of global corporations that either warned about a financial hit or scrapped their forecasts altogether.

Additional reporting by David Flynn

31 May 2018

Total posts 2

Only $114 USD investment in virgin Australia?

QF

11 Jul 2014

Total posts 339

Will this lead Virgin with another marriage tie up to Qantas? I was spruiking the Virgin shares were very under valued coming into the end of the financial year until the Coronavirus hit. Money would have been made from buying the HNA shares and reselling them.

Qantas - Qantas Frequent Flyer

04 Nov 2017

Total posts 153

Not likely. If anything, CA may become "accidental" owners of HNA's VA and HX stakes.

Since CA has a financial stake in CX, CA will likely want to sell the VA stake off ASAP, in addition to "liquidating" HX by either returning the leased planes and perhaps "sell" the owned aircraft to CX (or other interested parties).

Qantas - Qantas Frequent Flyer

20 Aug 2014

Total posts 101

Now is not the time for airlines in China to be investing in more aircraft or other air related assets. Unless they are forced to by the government, i can't see any buyers for the assets. Airlines are parking planes. Not buying them.

Virgin Australia - Velocity Rewards

11 Dec 2016

Total posts 52

I really don't get why China doesn't merge all the airlines into one. Would be so much easier. 3 big ones compete with each other but owned by the government.

Just the usual chaos that defines China though.

Virgin Australia - Velocity Rewards

11 Dec 2016

Total posts 52

It's logical that China would like to have a share of an Aussie airline though. They own so many other assets in Oz already.

Would be nice if ANA bought the share now. They have some good links around Asia that would be good to use as a connection hub to replace hk.

Virgin Australia - Velocity Rewards

03 Jun 2014

Total posts 11

I wonder if the long rumoured Delta purchase of a share in VA might happen? Could be a strategic move for DL after their share purchase of LATAM to get a new partner in Aust with LATAM leaving oneworld.

10 Apr 2016

Total posts 21

Rather than an off market share buy back should Qantas be opportunitic and buy a few very cheap A330s with their spare cash.


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