Chinese Conglomerate HNA Unravels. Its Airlines Get Bailed Out, Except Perhaps its Hong Kong Airlines
HNA gets another state-funded bailout for its many airlines, but there are doubts Hong Kong Airlines, which may cease to operate on Saturday if it doesn’t get funding, will get any funding.
By Wolf Richter for WOLF STREET.
HNA Group, the highly-leverage Chinese conglomerate with an opaque ownership structure that had gone on an immense debt-fueled global acquisition binge, including in the US, and owned about 18 airlines in China and Hong Kong, has been unraveling ever since Bank of American pulled the ripcord in mid-2017.
But to prevent this unraveling from becoming too messy and to prevent the airlines from collapsing on top of the markets they serve, and to prevent investors and lenders from getting whacked by massive and well-deserved losses – well-deserved because they had been backing a nutty global acquisition binge – the Chinese government has been stepping in and pulling all kinds of levers, with huge sums involved, to bail out the airlines and assorted investors, moral hazard be damned.
The latest is HNA-controlled Hong Kong Airlines, the city’s third largest airline. The bailout is unfolding right now, amid uncertainties if it will actually unfold, and how much of the bailout money HNA Holdings, the parent company of multiple to-be-bailed-out airlines, will even channel to Hong Kong Airlines.
The debt-fueled binge by HNA Group bagged 30 acquisitions in the two-year span between mid-2015 and May 2017, including large real estate deals, such as the $2.2 billion trophy office tower in Manhattan, a 25% stake in Hilton Hotels, a deviously obtained 9.9% stake in Deutsche Bank, the $6 billion acquisition of Ingram Micro in California, and forays into global aircraft leasing and global airport services. In addition, HNA Group owned outright or controlled 18 airlines mostly in China and Hong Kong before it all began to unravel.
Financial pressures began in 2017. In 2018, as the company began to run out of money, it started dumping some of its acquisitions to raise cash, including big batches of its stake in Deutsche Bank, office properties in Manhattan and in London, but that wasn’t enough. It’s never enough once a conglomerate starts unraveling because there is too much debt.
Rather than allowing this monster to collapse and then sort through the debris, the Chinese government has stepped with series of bailout via its state-owned banking system, and has been restructuring the debts, and has been transferring ownership of bailed-out airlines to participating local governments, including Urumqi Air, Capital Airlines, and Guangxi Beibu Gulf Airlines.
Last week, Grand China Air defaulted on a maturing 1-billion-yuan ($142 million) bond. And this will also have to be dealt with.
On Monday, HNA agreed to surrender majority control of local budget carrier West Airlines to Chongqing Yufu Assets Management Group, a government “bad bank” owned by the megacity Chongqing in southwestern China. Before this transfer, Yufu already indirectly owned 30% of the airline via its ownership of other companies that own shares in the airline.
But now, it’s Hong Kong Airlines that is getting bailed out – or not.
On Monday, it was announced that HNA Group has received a three-year 4.75% loan of 4 billion yuan ($568 million) to pay the operating costs – fuel, take-off and landing fees, wages, aircraft leasing costs, etc. – faced by HNA’s airlines division, HNA Holdings, and its remaining affiliated airlines, including Hong Kong Airlines.
A syndicate of eight banks extended the loan, including at least six state-owned banks: China Development Bank, China Exim Bank, Industrial and Commercial Bank of China, Bank of China Hong Kong, China Construction Bank, and Agricultural Bank of China.
Hong Kong Airlines, which flies to “over 30 destinations across Asia Pacific and North America,” had already announced at the end of November that it would cut some of its routes, including to Vancouver, Canada, as part of a survival-focused belt-tightening.
On Monday, the Air Transport Licensing Authority (ATLA) of Hong Kong gave the airline an ultimatum to obtain fresh cash by Saturday in order to avoid having its license suspended or terminated. ATLA said that the airline’s financial position had “deteriorated rapidly” and no longer met the minimum requirements under its permit.
The airline “acknowledged” the demands by the ATLA and said:
As weak travel demand resulting from the social unrest in Hong Kong has continued to affect our business and revenue, Hong Kong Airlines has reduced its capacity and flights in the coming months as well as further consolidated its network under the challenging business environment.
Hong Kong Airlines is actively communicating with our shareholders and other stakeholders to meet the new requirements from ATLA as requested.
On Tuesday, as it is waiting for the funds, Hong Kong Airlines said that it would try to avoid layoffs among its staff of 3,500 people, according to the South China Morning Post.
Also on Tuesday, ATLA said that Hong Kong Airlines still hadn’t submitted its financial plans.
Senior staff at the airline have told the SCMP that they have doubts about how much of the 4-billion-yuan loan would reach Hong Kong Airlines. No specific amount has been earmarked for the airline. These senior staff members told the SCMP that they didn’t trust HNA and doubted its sincerity “based on what they said were empty promises they had been given on previous occasions.”
Among these empty promises: Last March, HNA had sold Hong Kong Express airlines to Cathay Pacific for HK$4.9 billion. At the time, HNA had promised ATLA that the funds would be used to shore up Hong Kong Airlines. But now, according to the SCMP, there were “unanswered questions” about proceeds from the sale, and there was “no evidence” that any of the funds were channeled to Hong Kong Airlines.
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