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Chinese Airlines Flex Their Global Muscles With Investments

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Chinese Airlines Flex Their Global Muscles With Investments

Chinese Airlines Flex Their Global Muscles With Investments
August 10
11:21 2016

MIAMI — Last week, news broke that the parent company of Hainan Ailrines, the largest private airline in China, had finalized its purchase of a 23.7% stake in Brazilian low cost carrier (LCC) Azul Airlines for $450 million.

The deal was first announced back in November of 2015, will also allow Hainan to appoint three members to Azul’s board and ratchet up cooperation on initiatives such as codesharing, frequent flyer program alignment, and joint marketing efforts.

The deal’s approval was likely hastened by a recent rhetorical shift towards liberalization in the Brazilian air travel market by the country’s government.

This is only the latest in a series of stake acquisitions by Hainan – who is following in Etihad’s footsteps

The purchase of a stake in Azul marks just the latest move by HNA Group (Hainan’s parent) to expand its global reach in commercial aviation. In addition to the 52.3% it owns of full service Hong Kong Airlines, its various domestic subsidiaries within China, and LCC HK Express, HNA Group has made the following purchases in recent years:

    • 49% of the shares of Istanbul-based cargo carrier MyCargo Airlines (2011);
    • 48% of the shares of French leisure airline Aigle Azur for $66 million (2012)
    • 6.2% of the shares of South African regional carrier Comair for $13 million (2015)
    • 13% stake in Virgin Australia for $114 million (May 2016)
    • 7% stake in Atlantic Gateway, which owns 45% of TAP Portugal (June 2016)
    • 100% stake in Gategroup Holding, the world’s second largest aviation catering firm. (July 2016)

In a lot of ways, what Hainan is doing is particularly interesting because it mirrors the so-called “equity alliance” strategy pursued by Middle Eastern giant Etihad Airways, and not just because both are now stakeholders in Virgin Australia.

Etihad’s strategy has played out with a higher caliber of airline, as it has purchased stakes in quasi global players like Jet Airways and Alitalia. But nonetheless, HNA is slowly building up a worldwide alliance of airlines based in a variety of key mature (Australia and France) and developing (Africa and Brazil) markets, with more almost assuredly to come.

There is a particular logic here for Hainan, in that these rights could represent a mechanism by which it can make an end run around the constraints of China’s bilateral agreements and route allocation process. Even though Hainan is one of the world’s largest airlines, it is less preferred in the eyes of the government relative to Chinese giants and CAAC remnants Air China, China Southern, and China Eastern — known as China’s ‘Big 3’ carriers.

Even though Hainan is a major long haul player with a fleet of 23 Airbus A330s and 13 Boeing 787s (with 27 more on order), it has largely been relegated to either serving second tier routes from first tier Chinese cities (such as Beijing – Berlin), or second tier Chinese cities from first tier destinations (Changsha – Los Angeles). On the preferred routes like Beijing – Los Angeles, or Shanghai – Paris, Hainan is routinely shut out by the other Chinese giants.

But these investments give Hainan an interesting workaround. In theory, there’s no reason Hainan can’t “deliver” a couple of its 787-9s (or older A330s) to Aigle Azur and begin flights from Paris to Shanghai, Shenzhen, and Beijing. Doing so would mean that the allocation of the seats came from the French side of the bilateral agreement, thus allowing China to maintain its preference for the ‘Big 3’ carriers while giving Hainan more access.

Etihad executed this strategy to a T with Jet Airways in India, and as a result is now a viable competitor to Emirates in the sub continent.

Other Chinese carriers are also eyeing foreign stakes – we project $5 billion spent by 2020

Also last week, news emerged that Chinese flag carrier Air China had expressed interest in acquiring a 49% stake in troubled Star Alliance partner LOT Polish Airlines, which recently returned to profitability, but remains plagued by overreach by the Polish government, current owners of LOT.

To date, HNA is the only Chinese carrier to engage in serious investment activity abroad, but it would appear that domestic rivals also wish to follow suit. The attractiveness of this strategy for China’s airlines, in addition to any overlap with government foreign policy objectives (another variant of the direct investment in, for example, Africa over the last few years), is similar to the attraction for Hainan.

Whether or not the airlines are profitable, they represent additional feed and potentially additional route rights though this is less appealing for the ‘Big 3’ as they can functionally get any route that they want from the Chinese government.

Thus, we would like to make a prediction, one that’s pretty bold. It’s our view that China’s burgeoning airlines, buoyed by resurgent domestic consumer spending and demand as well as a currency that’s pegged to a still robust dollar will spend $5 billion on foreign airline investments by 2020, surpassing the spending spree by the U.S. legacy airlines in that period.

A global aviation megatrend hits Asia’s shores

China’s airlines aren’t alone in the Asian market in looking outward for foreign investment. Japanese giant All Nippon Airways (ANA) has also begun to spread its investment tentacles, buying an 8.8% stake in Vietnam Airlines earlier this year for $108 million. The investments by the Chinese carriers, ANA, and the U.S. legacies all hint at a broader megatrend in global aviation.

Thanks to globalization, the liberalization of international air travel markets, and divergent economic performance in different countries, we have found ourselves in a bifurcated global airline industry. The true global giants (airlines in the U.S., developed East Asia, China, Middle East, and Europe) are now in a position where they’re cash rich right at the moment that the old flag carriers and smaller private airlines are struggling, creating the perfect opportunity to scoop up underpriced assets.

As the gap between the ‘haves’ and ‘have nots’ accelerates, we can expect to see more investment activity of this type.


About Author

Vinay Bhaskara

Vinay Bhaskara

Senior Business Analyst, Big Airline Enthusiast, Avid Airport Connoisseur, Frequent Flyer, Globetrotter. I Miss Northwest Airlines Every Day. @TheABVinay

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1 Comment

  1. Phoenix
    Phoenix August 10, 21:32

    Once again nicely researched and well presented Vinay. Some very fascinating what-ifs brought up.

    Do allow me to add:
    – The reason HU is unable to serve the prime international city-pairs is not solely because of the Chinese big-3 carriers, the Chinese government has a policy of only allowing one Chinese carrier to serve any one international route. And this is where the favortism of the big-3 comes into play: they get first dibs on any new route, and whichever carrier gets allocated that route will keep flying that given route even if it generates a loss, just to stop a competitor from taking it over and potentially turning profits in the future.
    – That said, assuming no legal roadblocks, HNA sending new long-range aircraft to ZI to tap-dance around the Chinese regulators is a most intriguing possibility. I can’t imagine, say, Air France or CZ/MU/CA being too happy about it. My money’s on the Chinese govt putting a kibosh on it.
    – It’s also a great mental exercise figuring out HNA’s strategy or end-game. Yes HNA is hurting for prime city-pair route allocations, and they could always use more reach internationally and more feed into China, but I can’t help but think they’ve got way too much cash to know what to do with. ie. “What strategy? What end-game? Just park money somewhere just not here FGS.” Given the, shall we say, profligate spending patterns of personally-observed mainland Chinese I would not be surprised if this were true, as little business sense as that makes. (Not that I’m discounting your hard work of course, simply presenting an alternate scenario :))
    – Now, if I actually go ahead and indulge your Etihad “equity alliance” equivalency hypothesis for a moment and assumed HNA is pursuing a similar strategy, then HNA’s road map would be dramatically different than EY’s. For Etihad, profitability aside, AZ, 9W and AB certainly are well known and have international reach, and JU is growing and just about there. For HNA, AD, however, is retrenching internationally (although that is more indicative of Brazil’s economic woes rather than the airline’s own business strength) and Comair is showing no signs of growing outside its South African niche. If HNA intends to grow ZI into a viable feed partner then they’ve got A LOT of growing to do – 3x A319s and 7x A320s do not an international carrier make. VA, HX, and TP, in my view, are less investment opportunities and more ready-made feed partners.
    – At least HU is considered to have the best onboard product of the mainland Chinese international carriers. Is this enough for travellers to go out of their way to fly them over the Chinese-3? To be determined….

    Sorry for the long rambling post, and thanks again for the article!

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