Rise & Rise

So who is Chen and how has HNA blossomed into such a force on the world stage? Born in Shanxi province in China’s north-west in 1953 he trained as an economist. But surprisingly, given his close connections with the Communist Party, his academic achievements were hardly confined to socialist norms. In 1984, Chen graduated from the Lufthansa College of Air Transport Management in Germany, gained an MBA from Maastricht School of Management in the Netherlands in 1995, and a senior management diploma from Harvard Business School in the US in 2004. He is a product of Beijing’s economic rise and policies that aim to retain a socialist culture while using decidedly capitalist measures to make the country a global economic powerhouse.

So while he boasts high Western academic achievements, Chen over recent years has remained one of Beijing’s favourite sons. A member of the National Committee of Chinese People’s Political Consultative Conference, he has been showered with such accolades as being a “National Model Worker” and an “Outstanding Constructor of Socialism with Chinese Characteristics”. At present, he is also a member of the 11th Session of the Executive Committee of All-China Federation of Industry and Commerce and a part-time professor at the Civil Aviation University of China, Beijing Jiaotong University, Northwestern Polytechnical University and Nanjing University of Aeronautics and Astronautics.

In the midst of this he is a devout Buddhist – HNA’s 31-storey headquarter building in Haikou was built in the shape of a Buddha – and he is the opposite of the stereotypical Chinese tycoon. At a World Economic Forum in Davos, Switzerland he once declared: “I live a simple life. I don’t drink, smoke, have banquets, go to karaoke or get massages. I’m different from the other entrepreneurs in China. ” The HNA story really starts in 1990 when Chen was appointed aviation advisor to the governor of Hainan Province, presiding over the formation of Hainan Provincial Airlines Company. It launched with a single Boeing 737 and Chen himself rolled up his sleeves to push a refreshment trolley up and down the aisle of the lone jet during its start-up years. It became Hainan Airlines – now HNA’s flagship entity – in 1996, following a restructure and after Chen had flown to New York to successfully persuade billionaire George Soros to invest $33 million in the carrier, an investment Soros later doubled.

Over the years, Hainan Island, with its palm-fringed beaches and resort atmosphere, has become HNA country. One of China’s Special Economic Zones, Chen controls the province’s two main airports and runs hotels, supermarkets, department stores, insurance firms, ship repairers and logistics services. It is, however, clearly an island not big enough for HNA’s ambitions. From that single 737 a quarter of a century ago, Chen now controls a fleet of around 500 aircraft – Hainan is China’s fourth largest carrier – across its airline subsidiaries.

In Greater China alone (including Hong Kong) it now owns or part owns 14 operators: Beijing Capital Airlines, Deer Jet (a private jet operator), Air Changan in X’ian, Fuzhou Airlines, Grand China Air, based in Haikou, GX Airlines in Nanning, Hong Kong Airlines, LCC HK Express, LCC Lucky Air in Kunming, Tianjin Airlines, Urumqi Air, LCC West Air in Chongqing and Yangtze River Express, a cargo airline based in Shanghai. In June, the 14th member of the group, Air Guilin, a new carrier based in southern China’s scenic Guangxi region, received its air operator’s certificate, beginning scheduled domestic services later in the month. Plans are underway to launch yet another carrier, Ningbo Airlines.

Hainan Airlines itself operates 166 aircraft: 122 737-800s, six 737-700s, 14 A330-300s, nine A330-200s, three 767-300ERs, 10 787-8s and two 787-9s. On order it has 28 more 787-9s, one 737-800, one A330-300 and 22 of China’s new jet, the C919.

Chen now controls a fleet of around 500 aircraft.

With the group now serving nearly 500 domestic and international routes covering more than 90 cities it has been no surprise that HNA is intent on spreading its tentacles offshore. It already has stakes in six foreign carriers. Apart from Virgin Australia it has a 48 per cent share in France’s Aigle Azur, bought for $89 million, a 23. 7 per cent stake in Brazil’s Azul, purchased for $607 million, and a 6. 2 per cent stake in South Africa’s Comair, costing $13 million. It also has an interest in Ghana-based Africa World Airlines (AWA) and a Turkish freight operator, MyCargo, although the extent of the investment in these two carriers is unknown.

Airlines are only the tip of the iceberg. In the transport and tourism arena HNA’s appetite for acquisition appears limitless. In July last year it bought airport baggage handler Swissport International for $3. 8 billion. In January this year it completed a $10. 3 billion takeover of aircraft lessor Avolon Holdings. It also confirmed last month an offer for Swiss-based airline catering firm Gategroup, understood to be in the region of $2 billion. And it is trying to buy Air France subsidiary Servair, which provides services to the aviation industry, including cleaning and catering. HNA also runs hundreds of hotels around the world. It recently bought Carlson Hotels, owner of the Radisson hotel chain, for an undisclosed amount. Other recent acquisitions include Seattle-based group Red Lion Hotels, a California-based electronics distributor Ingram Micro for $8. 1 billion and a major office tower at London’s Canary Wharf. Chen’s only failure on record: an attempt to buy London City Airport earlier this year.

When it comes to airline investments offshore, however, some analysts appear a little puzzled over exactly what HNA’s strategy is. While buying into Virgin Australia certainly makes sense, given the growth prospects on China-Australia routes, none of its other airline investments have been world beaters.

One example is France’s Aigle Azur, which HNA bought nearly half of in 2012. It operates A320s from France to Algeria, Mali, Senegal, and Portugal. “Why does this fit in the HNA portfolio?” asked consultants CAPA – Centre for Aviation.

“Back when the transaction occurred, CAPA suggested that the primary rationale was that HNA was restricted from flying on many France-China routes because of Chinese aviation policy which allows only one Chinese airline on each route. With a French airline, Hainan could codeshare on flights from France to China operated by Aigle Azur. But the predicted acquisition of A330s to fly the route hasn’t materialized since Russia denied permission to fly over the country. So far, Hainan on its own flies from X’ian to Paris, but that’s about it. Maybe the long-term goal is to get around Chinese laws so it can fly more to France, but in the meantime, it owns half an airline flying nowhere relevant. ” CAPA says the investment in South Africa’s Comair, a profitable airline operating as a British Airways franchise, is also strange. “The investment was small at just over six per cent. While Comair is profitable, this investment really makes little sense in the context of HNA’s broader strategy (if it has one). ” Then there is Azul in Brazil. Said CAPA: “After succeeding early, Azul continued to grow quickly, even venturing into long-haul flying to the US. But then Brazil’s economy tanked badly, and with it, all Brazilian airlines found themselves in trouble. First, Azul sold a stake to United and then HNA ponied up as well. What does this have to do with anything? It’s unclear.

HNA’s acquisitions don’t really seem to fit in any particular pattern.

None of them have proven to be overly successful so far, but then again, we don’t really know much about the underlying financial details. ” At some stage, say other analysts, this apparently unconnected jigsaw may come together but if it does, it will certainly be long-term. As it grows its 787 Dreamliner fleet Hainan has certainly been aggressively expanding its global network, particularly to the US. Since 2008, when it launched from Beijing to Seattle, a route then not served by China’s big three operators, it has added Chicago, Toronto, Boston, San Jose, and Calgary (launched in June) from Beijing and also flies from Boston and Seattle to Shanghai. More recently, it added a flight from Los Angeles to Changsha, a “smaller” Chinese city with a population of only five million. In Europe it operates to Berlin, Brussels, Manchester, Moscow, Paris, Prague and Rome.

CAPA points out that HNA now has a presence on every inhabited continent. “Yet the value of this is at present uncertain. Hainan’s airline investments cannot be judged in the same way as those by other carriers,” say the consultants. “The group has considerable funds, meaning that synergies can be distant, and returns very long-term. At times the group appears more as an investment vehicle than one linking aviation companies, but with the market looking favourably, in HNA’s view, on purchases, perhaps this is the time to buy, and develop focus later. ” Focus, HNA must, says CAPA. “While its international investments are showing scope for integration, the largest opportunities to mesh together are around China. Regulatory matters make complete integration challenging, but there is plenty that can be done. The international purchases risk distraction of HNA’s home market. ” Clearly, it is not a view held by Chen, who remains determined to make sure HNA continues to expand its presence, both within China and across the globe. HNA’s acquisitions don’t really seem to fit in any particular pattern.