HNA Group restructuring Part 2: Foreign airport aspirations

Summary

• HNA Group enters administration; possibility of new investors for Hainan Airlines.
• The group also has 16 airports in China and one abroad.
• The likelihood of domestic investors into the Chinese airports is moderate; the likelihood of foreign investors is very slim.
• The international portfolio is so small that it is not worth disposing of.
• That portfolio could have been much bigger, but HNA never matched its ambitions with actions, largely due to its financial issues
• Breaking - China repeals its regulations on foreign investment in the civil aviation industry

Please also see Part 1 of the HNA report: HNA restructuring may mean ownership changes for China's airlines.

HNA's bankruptcy was coming for 10 years

On 29-Jan-2021 China's HNA Group - a huge multi-industry enterprise covering air transportation, airport management, hotels, logistics, real estate, retail, tourism and other related industries - applied for bankruptcy and reorganisation, after a long period of financial struggle and amid allegations of embezzlement. Creditors applied to the courts for bankruptcy proceedings because the group could not pay off due debts.

It was hardly unexpected. As long ago as 2011 the group was denying reports that it was operating at significant losses due to its recent mergers and acquisitions.

In Feb-2020 Chinese authorities had already stepped in to run one of the largest conglomerates in China, as it struggled to overcome a debt crisis made worse by the emergence of COVID-19. The latest financial report that the company had published, covering 1H2019, showed that it had RNB706.7 billion (USD109 billion) of debt.

HNA once attracted global attention for its aggressive spending, including a stake in Hilton Worldwide Holding and Deutsche Bank. It was noted for its highly complex ownership and risk-sharing structures.

The group became indebted after liquidity issues emerged in 2017.

A huge airline portfolio…

HNA Group is the second largest shareholder in Hainan Airlines, one of close to 20 airlines it holds a stake in within China and abroad, and it retained a fleet of 900 aircraft.

It is the airline part of the business that is attracting most attention.

There is speculation that Hainan Airlines, China's fourth largest, could attract new investors, as its operations are stable at this time. All HNA Group subsidiaries will spend this year negotiating to bring in strategic investors, according to media reports.

…and domestically the airport portfolio is impressive, but not internationally

But where does this leave HNA's airport portfolio, almost all of it within China itself, and what impact will it have on its foreign airport ownership ambitions?

It would be fair to say that the company's ambitions in the foreign airport sector were once very high, but also that they were scaled back dramatically from 2017, when its financial situation began to deteriorate.

Having once chased around the world looking for deals, it now has only one investment: namely part-ownership of Frankfurt Hahn, the secondary level LCC and cargo-oriented German airport.

Within China itself, and by way of subsidiaries, and subsidiaries of subsidiaries, such as HNA Infrastructure Group/HNA Airport Group/HNA Airport Holdings (Group), the group holds stakes ranging from 50% to 100% in 16 Chinese airports, as well as the partial stake in Frankfurt Hahn.

That is enough to register HNA as a 'Major Global Investor' in the CAPA Global Airport Investors Directory.

HNA Airports - active airports

Source: CAPA - Centre for Aviation.

Haikou Hainan Meilan and Sanya Phoenix are its domestic jewels

In China, the two most significant airports are Haikou Hainan Meilan, the gateway to Hainan Island, and Sanya Phoenix, both in the south of the country and both serving tourist areas.

In 2019 the Haikou airport handled 24.2 million passengers and the Sanya airport 20.2 million. Capacity at Haikou Hainan is currently running at 65% of the level of 2020, and at Sanya 73%.

Haikou Meilan is one of few airports in China to have been the subject of foreign investment.

Copenhagen Airports held 20% of the equity before selling it to Oriental Patron (Hong Kong). Copenhagen Airports is one of several early investors into China that found a minority holding to be valueless in terms of strategic direction. They included Aéroports de Paris and VINCI Airports, which also exited China, although Fraport remains a minority shareholder at Xi'An Airport.

Foreign investors unlikely to return to Chinese airports

As for the likelihood of foreign investors returning to China to invest in either of the Haikou and Sanya airports (HNA's other 14 in China are regional ones), the potential for that remains very slight.

In the preface to the Airport Privatisation and Finance Review (Sep-2018) it was stated "while China is home to several global-scale external investors (of which HNA was singled out)[,] it remains largely unwelcoming to inward foreign investment into its own airports."

There has been no change since then and there is not likely to be, following political unrest in Hong Kong, international condemnation of treatment of the 11 million Uighurs who live in Xinjiang, COVID-19, and now the military coup in Myanmar, which has ramifications for the whole of Asia.

If foreign airport investors are actually on the hunt for bargains just now, there are safer places in the world to put their own and their clients' money.

HNA's only foreign airport investment - for Hahn Airport there have been big passenger losses, but cargo gains

As for what will become of the foreign investments, there is only the one - Frankfurt Hahn, where HNA Group, along with Germany's ADC GmbH, purchased the Rhineland-Palatinate state's 82.5% stake in Frankfurt Hahn Airport for USD15.8 million in Aug-2017, although the Hesse state opted to retain its 17.5% holding.

HNA Group indicated that in the first few years of taking over operations it would invest EUR50 million at Hahn Airport, which has been losing both passenger traffic and cargo volume. HNA viewed the airport as one that could become a leading hub of commerce between China and Europe, in support of China's 'One Belt One Road' initiative.

It is possible that what emerges of HNA out of the administration could relieve itself of its share in an airport that can still play a part in that initiative; but passenger traffic there has been falling consistently year-on-year since 2016, reducing from a 10-year high of 3.5 million (2010) to just 1.5 million in 2019.

And that was before COVID took its toll.

Frankfurt Hahn Airport: annual passenger numbers, 2010-2020

Source: CAPA - Centre for Aviation and Flughafenverband ADV (German Airports Association).

On the other hand, cargo capacity has grown consistently since 2017, even in 2020 in common with many other airports as e-commerce and the carriage of medical supplies increased dramatically. That is more in keeping with the Belt and Road initiative than is passenger numbers.

Frankfurt Hahn Airport: annual system cargo payload (kg) capacity, 2013-2021*

Source: CAPA - Centre for Aviation and OAG.

Plovdiv, Belgrade, Osijek: all Central European airport aspirations revolved around the Belt and Road initiative

The other airport in Europe in which HNA almost became an investor and operator is Plovdiv Airport, which serves Bulgaria's second city. Once again, cargo potential and relationship to the Belt and Road initiative was the driving force.

In Mar-2018 Bulgaria awarded HNA Airport Group a 35-year concession to operate Plovdiv Krumovo International Airport, during which HNA was obliged to make investments amounting to EUR79 million, including a new cargo and passenger terminal and an MRO facility.

But by October of 2018 the concession was cancelled after HNA, which by then was becoming increasingly embroiled in its own financial crisis, lost interest and withdrew its offer. The concessionaire would have made a fixed fee of BGN600,000 (then EUR306,775) per annum, and a variable fee of 6% of total net income from all concession activities. That would have bought it an enviable location for cargo activities in Central and Eastern Europe.

With regard to other potential investments in Europe, they began as long ago as more than a decade, when HNA bid unsuccessfully for 27.6% of Brussels South Charleroi Airport in Belgium (eventually won [20.68%] by Italy's S.A.V.E.).

Around that time HNA Group was rumoured to be scouring Europe for airport assets as part of its ambition of building a world-class enterprise and being a world-famous brand. HNA's website stated that it would "cooperate with all the outstanding enterprises and people of insights all around the world for a bright future".

Other potential European investments subsequently included Belgrade Nikola Tesla Airport (2017). Serbia's Government received four binding bids for the 25-year concession of Belgrade Nikola Tesla Airport, including one from a consortium of HNA Airport Group, AVIC International Holding Corporation and Chinese-ASEAN Investment Cooperation Fund. (China's Shenzhen Airport Group was another bidder). Hainan Airlines, also part of the group of course, had planned to launch Beijing-Belgrade service in tandem with this HNA investment into Belgrade Nikola Tesla Airport.

The successful bidder on that occasion was VINCI Airports and passenger traffic continued to increase strongly through to 2019, although cargo volume (at least as desirable for HNA) did not, actually decreasing by 6% in 2019.

Looking at maps of Europe and comparing them to the Belt and Road Initiative - it is plain to see how these airports (Frankfurt Hahn, Plovdiv and Belgrade) would fit into the jigsaw.

Relationship of Plovdiv, Belgrade (Serbia) and Frankfurt

Source: Google Maps.

The New Silk Road

Source: Xinhua/Novinte.

HNA has also, over time, talked to representatives from the governments of Croatia and Slovenia about potential interest in airport infrastructure. In Croatia the interest was in the underused Osijek Airport. According to its CEO, HNA was "committed to establishing additional partnerships in Central and Eastern Europe".

In fact, it has been very active throughout what was previously Yugoslavia.

Considered a EUR100 million bid for an airport which now lies abandoned

Before that, HNA registered, and then withdrew, interest in investing in the Ciudad Real airport project south of Madrid, where it considered a bid of EUR100 million for an airport which now lies abandoned, and for the assets of what was then Germany's Hochtief AirPorts (now Avialliance), along with acquiring a 10% stake in BAA Airports Ltd.

But HNA's tentacles stretched further than that, even if there was another disappointing outcome.

Rio de Janeiro bid ran out of steam and money

In Sep-2017 the Brazilian regulator ANAC approved a transfer of 51% of RIOgaleão's equity in the Rio de Janeiro Galeão International Airport from the Brazilian company Odebrecht to HNA Infrastructure, with the residual 49% remaining with Singapore's Changi Airport Group.

The transaction may have been connected with the signing at the time of several protocols with China on investments in Brazil, out of which the Chinese President "ensured" support to Chinese firms seeking to invest there, in airports, ports, highways and railroads. Furthermore, HNA was planning to launch China-Lisbon-Rio de Janeiro air service, along with the group taking this equity.

Brazil and HNA agreed to co-operate further on infrastructure projects generally in Brazil, including airports, and the acquisition of a stake in Galeão by HNA was seen as the first step in HNA's expansion in Brazil.

However, the transaction did not take place.

Possibly because of its own financial woes at home, HNA failed to make the necessary payments on time. So, Changi Airports, as the existing shareholder, had the right to buy Odebrecht's share. The transaction was expected to enhance HNA Infrastructure's footprint and resources overseas significantly, and in Latin America, but clearly failed to do that.

Closer to home, HNA signed a letter of intent for strategic co-operation with Korea's Incheon Airport Group in May-2010 to construct the Beijing International Aviation City project, 4.5km from Beijing Capital International Airport, with an investment of CNY30 billion (then USD4.4 billion).

Two airport supply chain companies bought and sold

HNA has also been active in acquiring airport services and supply chain companies such as gategroup, the world's largest airport catering company, and Swissport, one of the world's largest ground handling companies. Both were subsequently sold on (2019 and 2020 respectively).

In summary, HNA Group is an immense corporation which showed great promise in terms of the airport sector. Many such firms have been and gone (or have shrunk, so that they are barely visible now) over the past two decades, including Macquarie Airports and GIP, while others have risen to take their place, such as Corporación América, and others still have come back again, such as VINCI.

The political situation in respect of China suggests that HNA will continue in control of its airports there, although some equity may pass into the hands of public sector authorities, or other domestic investors may be found.

The end of the (Belt and) Road? Africa is the loser

Internationally - this seems to be the end of the road for HNA's foreign airport ambitions, for its participation in the Belt and Road Initiative (at least from the aviation perspective), and for those Central European airports that were hoping to sustain their future development by way of deals that involve both financial investment and new long haul air routes.

As far as Belt and Road goes - TAV Airports seems to be filling that gap anyway.

See: TAV Airports attracted to New Silk Road investment opportunities).

Perhaps the biggest loss is to Africa.

HNA never showed much interest in the continent, which is peculiar because Chinese companies are ubiquitous there, extracting resources in return for the building of infrastructure. That infrastructure, along with the ever-growing population and improving economies, will need airports to service it.

Breaking news, 09-Feb-2021

The CAAC department of policies and regulations deputy director Yang Ying stated China repealed its regulations on foreign investment in the civil aviation industry, adding that a comprehensive 'clean-up' of regulations has been completed. Mr Yang said that the degree of openness to China's civil aviation is at a relatively high level among the world's major aviation countries. He said that airports and air cargo companies are the two major sectors to attract foreign investment.