Dragon wings clipped

Based on the group’s latest available financials – the six months that ended on June 31 – HNA still held about $114 billion of debt, among the highest levels in China. Of that amount, $35 billion was due to be repaid within a year, more than the company held in cash, equivalents and short-term investments combined.

The company’s profits couldn’t even cover its interest payments. This despite selling off more than $35 billion in assets since the beginning of 2018.

In April, creditors of the embattled Chinese conglomerate took the extraordinary step of seizing golf courses and other assets after a unit missed a loan payment. As for Hainan Airlines itself, the seriousness of the situation was confirmed when it amended its result forecast for 2018 to a loss of some $840 million.

The group has also been embroiled in an increasingly bizarre power struggle over control of full-service subsidiary Hong Kong Airlines (HKA). “It’s possible that HNA might not survive 2019’s planned debt obligations in its current form,” one analyst declared.

All of this, of course, has wider implications but the situation is so dire there are serious questions about the survival of HKA. In April, shareholders were told the airline needed at least $255 million in fresh funds or it would lose its operating licence. This came after the carrier announced it had lost $543 million in 2018, making an infusion crucial, according to people present.

They say accusations were also made that HNA had been siphoning off cash from HKA, which the conglomerate denies. No infusion has been forthcoming so far, which is hardly surprising given the parlous state of affairs.

The result is that HKA is downsizing, offloading nearly 60 pilots, with around 50 of them reportedly going to Emirates. Other recent reports indicate the airline may be looking to reduce its fleet from 38 to 28 aircraft by cutting 10 Airbus A330-200s. It has also reduced the number of flights it operates to Vancouver, Los Angeles and San Francisco. And, as has been well reported, the other HNA Hong Kong subsidiary, budget HK Express, is being sold off to Cathay Pacific Airways for A$407 million (a sale that is also being opposed by one shareholder). HKA has issued public statements saying it “is here to stay” and is “committed to sustaining our long-term growth… we have and will remain open to discussions with strong strategic investors”.

The problem is: who do you believe? While all this trimming is going on there is a background boardroom battle over who is actually in charge. Zhong Guosong, a former director of HKA, has declared he has taken control of the carrier, proclaimed himself chairman and accused HNA of various acts of malfeasance, claims that HNA has denied.

HKA says it doesn’t recognize Zhong’s chairmanship but acknowledged that the dispute has seriously disrupted order at their offices. That dispute has moved into the Hong Kong High Court and has become a three-way contest over who legitimately owns HKA shares and is entitled to be in charge.

Zhong, with Frontier Investment Partner (FIP) and Hong Kong Airlines Consultation Service are being opposed by current HKA director Hou Wei, backed by the HNA Group.

As it stands, Zhong owns 27 per cent of the carrier through Hong Kong Airlines Consultation Service, Frontier holds 34 per cent and HNA has a 29 per cent share.

While events in China are often complex in nature and Beijing has taken steps to curb some of the excesses of its major corporate conglomerates and their tendency to spend big on overseas investment, the action has obviously come far too late in the case of HNA.

The situation can be described as nothing less that a total mess. Industry observers believe the HNA Group is virtually in the process of being pulled apart piece by piece and its future is extremely shaky.

Cathay Pacific, with its purchase of HK Express, given the deal is finalised by year’s end, is a likely winner because it finally gets into the low-cost carrier market it has resisted entering for years and which has been a troublesome competitor.

Most think the buy was a bargain at $407 million. Would it look to snap up HKA for a bargain basement price, thereby securing its position as Hong Kong’s only operator? That remains to be seen and competition authorities might not allow it.

Whatever happens, the airline scene in southern China seems set to be in turmoil for some time to come.

‘The situation is so dire there are serious questions about the survival of HKA’