There are “doubts” its Hong Kong Airlines, which may cease to operate on Saturday if it doesn’t get a bailout, will get a bailout.
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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While companies going on foreign acquisition sprees ( and losing money on them) are nothing new, the current situation will only heighten the risks.
The world is resegregating into trade blocs. The term “Specially Designated National” is one that investors should familiarize themselves with. Formerly applied to unsavory individuals like a cocaine kingpin or some banking scoundrel it is a list of people and companies that are prohibited from using the US banking system. Huawei is under threat of being designated a ‘SDN’ which would effectively banish it from the US. It might be the first major global company to make the list but I doubt it will be the last.
Events are moving fast as China, the US and EU diverge on trade and political objectives. Companies have relied on WTO trade terms or offshore finance are going to have difficultyl
Like in a Dr. Evil kind of way?
“deviously obtained 9.9% stake in Deutsche Bank…”
Via a controversial complex set of transactions through a Swiss company to keep its buying activity hidden from German regulators.
Well, considering DB has lost about 80% of its value over the last few years, it didn’t work out the way they expected.
2Banana:. Proves their is no honor amoung thieves!
But then central bankers bailing them out!
The new normal!
Sorry, it worked out exactly as expected. Remember, this is another prime example of a cash burning machine.
As it worked out for them it was like secretly acquiring a truckload of garbage.
But at least that acquisition. Worked out for HNA, right? Right?
LOL
There are two things I find very interesting in this situation. First, according to Yahoo, Hong Kong was “the most visited city” in 2019, which makes me wonder how the “unrest” can be hurting the tourist related industries (like airlines). Perhaps those “police” with strange accents only count as visitors, not tourists?
Second, and almost amusing, is the fact that they called out the route to Vancouver, BC as one they are ending. Vancouver is home to a huge number of Hong Kong expats who have been moving there since the 1980’s. Cutting this route is a slap in the face of those who still have family in HK. It’s hard for me not to believe that it wasn’t politically motivated.
KGC: My guess a subtle hint to sparkle socks!
Considering the huge number of owned but vacant houses in Vancouver most Hong Kong expats must live and work in Hong Kong,
They all of course have Canadian passports just in case. If the exit door were to unexpectly close suddenly their hoped escape may prove problematic.
The Saudis hotel experience comes to mind! Or maybe worst, Hotel California!
… according to Yahoo, Hong Kong was “the most visited city” in 2019,
Does it count as a ‘visit’ that ‘everyone’ going to the Philippines travel via Hong Kong (then Manilla then by super-dodgy regional airline somewhere within 500-1000 km of the destination, the last bit to be done in Taxi)?
‘We’ (wife & friends) considered going to some ‘bounty-beach’ Phillipine resort last year, but, looking at the itinerary, I refused to go!
Really. When my wife visited Australia the only affordable route was a HK connection. Same for my friends who just moved back there. Gotta have that jet B go juice and actually keep the plane full as people disperse across Asia.
Atlanta and Chicago are pretty big hubs. Now, how many are actually visiting there?
That’s because Cathay has a (JFK)-YVR-HKG route.
From there you connect almost any other Asia to xxx .
Actually “it matters”. Hong Kong (HKG) was always the universal travelers dream. It is VISA-FREE so transfers were super easy especially on Cathay Pacific. If you have ever tried solving how to route Visa-Challenged Passport Holders around the world (incredibly many people including wealthy ones) you know how priceless HKG is. It is a great stop (to eventually go somewhere else).
The Philippine site you are probably talking about is either Boracay or Palawan (El Nido). These are worth visiting if you can tolerate some crowd.
If you have the real big bucks, there is Amanpulo or Banwa private islands. These “resorts” are not dodgy at all. Only for the super rich.
Is flying to Vancouver profitable for Hong Kong Airlines? Or is that a political question that should not be asked.
I just spent 9 weeks in HK. The city is dying.
Hotels are at 30% occupancy (maybe less) – many shops and restaurants are boarded up.
Hong Kong tourism suffers worst downturn since Sars outbreak in 2003 – arrivals down 40 per cent in August over protest crisis
There has been no improvement since the August numbers – things have worsened.
The protesters are engaged in a rebellion that is supported by the majority of HK people and they will NOT stop.
HK is too big to fail. Will China blink?
Check this out – if HK collapses surely China blows up – and HK is much bigger than Lehman or Greece – does this trigger GFC2?
https://www.reuters.com/article/us-hongkong-protests-markets-explainer/explainer-how-important-is-hong-kong-to-the-rest-of-china-idUSKCN1VP35H
“Hong Kong Airlines has reduced its capacity and flights in the coming months ”
When an airline reduces its capacity it is likely stuck with the lease charges. Out of curiosity, is it possible for an airline to lease its plane to another airline so that at least it is able to pay its lease charges. May be that is what is happening in the airline industry…
It depends on lease provisions.
For example some European airlines, chiefly based in Bulgaria, Iceland and Lithuania for fiscal reasons, operate leased aircraft and are chiefly if not exclusively involved in the ACMI (“wet”) lease business, meaning they specialize in providing a full package service to other airlines to increase or replace capacity. This year between the grounding of the Boeing 737 MAX and the various engine troubles suffered by Pratt & Whitney and Rolls-Royce they have made a killing, albeit the market is rapidly becoming oversupplied and once these problems are sorted wet lease costs will sink and take a host of these companies with them. What a surprise.
But most leases explicitly forbid the leasee from sub-leasing his aircraft in whatever form. In that case you are often much better off grounding the aircraft or, if the penalties don’t kill you, just return it.
Hong Kong Airlines most likely belong to the latter group.
Allow me here to add that as we speak Airbus has an A350-900 belonging to the HNA Group in the paint shop at Toulouse: unless the customer requires differently standard Airbus practice is to install the tailplane on the airframe already painted, so it’s pretty easy to spot whose aircraft is being shuttled around the various shops at Blagnac. ;-)
Last year Airbus and HNA Group had a legal dispute over 6 unpaid Airbus A330-300 which was only solved by when the French and Chinese governments directly intervened. To cut a long story short the Chinese government paid for the aircraft through the China Export-Import Bank, but only after the French government had armwrestled Airbus into taking a haircut on the order.
Hainan Airlines and her daughter companies have joined a growing list of airlines worldwide which have been if not nationalized outright at very least become Wards of the State: Alitalia, Condor, South African Airlines… I strongly suspect the abolition of bankruptcy which is standard practice throughout the financial sector is creeping into the airline sector as well.
And as one of my professors used to say “Capitalism without the threat of bankruptcy is as effective as religion without the threat of Hellfire”.
Care to tell us what was the inside story in the deal between Soros and HNA?
Years ago Hainan Airlines catapulted into the rankings of the 5 star airlines. Highly questionable and very mysterious. I still prefer the old reliable – Singapore, Japan and Korean. No more Cathay for me.
When money’s not a problem and you don’t have to turn a profit it’s easy to buy your way to whatever you like. Including the very top of the Skytrax ranking.
I am personally of the opinion HNA Group was a colossal capital flight scheme: its corporate structure is deeply opaque if not downright impenetrable with layers upon layers of shell companies all over the world, the so so called boîtes à secret. Perfect to make money exit from China and disappear, especially considering HNA had a habit of overpaying for everything and buying stuff not even the craziest Silicon Valley startup would touch with a 20ft pole.
I mean… these folks paid over €15 million for an 82.5% stake in the Frankfurt-Hahn Airport, a financial and infrastructural catastrophe.
Perhaps it’s my near legendary cynicism talking, but every time you see stuff like that there’s invariably some shady money laundering and/or do-ut-des scheme involved.
I fly from Europe to Asia and I generally fly Economy on Middle East Airlines: Qatar, Ethiad, Emirates.
they have the newest airplanes, best airports and being muslim owned less likely to be blown up.
“Capitalism without the threat of bankruptcy is as effective as religion without the threat of Hellfire”.
And if there is no threat of jail time, there is no such thing as crime.
Financial crime is so lightly prosecuted, especially in the US, that it can easily be said that there is barely enforcement at all, which amplifies the incentives and has enabled the modern return of the robber barons. They’re not just having a field day, they’re having an Endless Summer. On a dollar basis virtually all property crime is committed by the 1%, but being in the privileged class does, after all, have its privileges.
Worse, your Fearless Leader is giving away national treasures to favored robber barons to encourage their political support. None dare call that a quid pro quo. US national parks are expected to be duly corporatised and overexploited in short order. Last chance to see.
“And if there is no threat of jail time, there is no such thing as crime.”
The only reason why the bankers are making merry. In fact there should be jail time for bad policy and screwing savers… then the Fed inmates can have their FOMC meeting in the jail.
Presently the cabal walks all the way to the bank. In olden times we used to describe such guys as rascals…
This is less a micro problem with HNA , than a macro one with Chinese corporations in general. Because of the corporate leverage among Chinese companies, HNA will just be one in a long parade of coming defaults .
These defaults will highlight that the Chinese miracle is really a facade
Driving a BMW when you couldn’t even afford a bike 40 years ago is a nice facade. Economy has always the feeling of smoke and mirrors if you look deeply at it.
What the article omitted is that Hong Kong Airlines has “delayed” payroll to some employees. When you can’t meet payroll you’re probably insolvent. This is why the ATLA stepped in and gave HKA five days to recapitalize. If they’ve not plussed up the balance sheet by Friday their operating certificate will be revoked.
One of my favourite sayings, “You pretend to pay us and we’ll pretend to work”.
It won’t be long, now.
By some estimates, there is 50-100 trillion dollars of spare cash washing around the world financial system, looking for a home, so the odd $5 billion lost, here or there, is but a tiny spot on the butt of humanity.
Is this HNA debacle much different than the Japanese miracle of buying every prominent business or real estate back in the 80s? Look where the Japanese economy is today. Can the Chinese bailout all of their money losing companies without using up all those dollar reserves. China is on the ropes. The only reason they haven’t duplicated tinanmen square in Hong Kong is because the EU would have to make some attempt to punish them. A trade war with US, EU, Japan, etc would devastate them!
A trade war with US, EU, Japan, etc would devastate them!
China is historically accustomed to being poor and has been locked down for generations, so the ‘devastation’ you refer to, as it may be, can certainly be controlled with the usual appropriate measures and is unlikely to be of much concern to its masters.
The ‘trade war’ which should most concern you is not the one between the US and China, but between the US and Europe, neither of which is locked down. Both ‘trade wars’ are conducted by someone who no idea what he is doing and yet has no problem driving his own businesses into bankruptcy. You might like to take a look at that.
There is no trade war between the US and China but an economic war dressed up as a trade war.
Trade war is a negotiation tactic. Economic war is war without shooting. Modern wars rare have winners
Don’t you find it interesting that a lot of the ‘economic war’ against China is directed by the US against US companies operating in China? Not that this aspect is ever discussed, or even admitted.
Modern wars rare[ly] have winners
True enough. Typically both sides lose with the imposition of tariffs. There are plenty of examples on both sides in the US dispute with China. That said, ‘winning’ really isn’t the goal, certainly not for Fearless Leader. His goal is to score political points with the usual ham-fisted grandstanding, which is something he knows how to do, not to correct the trade imbalance with China, which is something he’s clearly clueless about. Policies would be very different if he were getting a piece of the action.
Economic war is war and can’t easily be solved with a win-win solution. It is not about money it is about power. It is WAR without BULLITS but with dying people (normally it is the not American side were people die because of shortages of medicine but in the American-Chinese economic war it is Americans that die because of shortages of needed medicines)
Trump’s policy is loved by the pacific fleet and all the pentagon China “experts”. It what DC wanted to do during Bush and Obama if they wouldn’t get off track because of the Middle East. Problem is it is to late and now they will end up losing.
This is something from youth, so bear with me: in the 80’s there was a Japanese tractor manufacturer called Toyosha. They mostly manufactured small tractors for Western companies like Massey-Ferguson, Allis-Chalmers and the like.
This was due to the fact that these small tractors were not just very very good, but sold at an extremely attractive price. Many considered this yet another proof that Japan Incorporated was poised to take over the world as Toyosha must have developed some secret production system that allowed them to sell those tractors at such a low price.
Then 1990 came and the Nikkei exploded. Toyosha was so financially stretched it became insolvent almost instantly: all their main bank, Fuji Bank, could do for them was to arrange a fire sale to Hitachi to keep yet another scandal from blowing up. Hitachi managed to make Toyosha quietly disappear into their corporate maze and went on to outlive Fuji itself.
There was no secret production system: Toyosha just sold tractors to Western customers at a loss to fuel growth (and hence inflate stock price) and engaged in the most audacious financial engineering, backed by banks such as Fuji and with the tacit approval of Japanese regulators.
These days you can still find Toyosha tractors at work, a testament to how well designed and built they were, but spare parts have been unavailable for many years and as they break down they have to be scrapped.
This is a whole lot more than will remain of many many Chiense manufacturers once the dust will settle: unfortunately we are probably looking many many years into the future.
Mainland China taking over Hong Kong is kind of like
North Korean subsistence farmers taking over Samsung.
Pol Pot Communism runs on jealousy, like that.
More than anything else,
the world needs a good psychiatrist.
This is a wonder of the world with a mysterious ownership, dead or alive.
Like a reading a comic book. Marvelous.
Urumqi Air, also Upecker Busline …
RD Blakeslee.
Urumqi (population of 3.5 million) is the capital of Xinjiang Uygur Autonomous Region (population 24 million). Everything in China is huge, even out of the way places you may have never heard of. Urumqi Airlines is a regional carrier just like there are many regional carriers in the US.
Just punnung. Sorry …
punning
Wolf,
How are defaults on Chinese bonds made public?
And the restructuring details, etc.
Is everything legally required to be translated into English and posted on some public website / financial reporting news agency?
Considering China is known to be opaque, I’m surprised you are able to report in such fine detail.
Yes, the Chinese bond market is immensely opaque. But defaults and restructurings become more or less public knowledge. US credit ratings agencies track them, and others do too.
What we don’t necessarily know of are the back-door bailouts by provincial or municipal governments of enterprises they own, or of enterprises that are important to them. This stuff goes on all the time. Much of that debt is “hidden debt,” as it’s called, and it seems even the central government cannot get a real grip on it though it has been trying.
For many of us, one of the biggest problems with Hainan Airlines (or its subs) is that it is NOT part of any big airline alliance. Seamlessly connecting is a huge issue. Don’t take this for granted if you travel many countries overseas. Comfort counts.