ow officially a pandemic, the novel coronavirus has spread across the globe causing countries and regions to close their borders to all but their own nationals, as well as restricting domestic travel. The airline industry, among others, is particularly susceptible, with airline executives appealing for government bailouts as they plunge into financial crisis.
In China, the epidemic may have proved the last straw for one of China’s biggest companies, HNA Group, which owns China’s fourth-largest airline, Hainan Airlines, along with several local airlines.
On February 29, the company announced it had asked the provincial government of Hainan, an island province in Southern China where the conglomerate’s headquarters is located, to lead a working group to address the liquidity risk the company is facing under the coronavirus outbreak. The working group comprises representatives from Hainan authorities, China’s central civil aviation administrator and the China Development Bank, according to the company’s statement released on the day.
In the meantime, HNA’s board of directors was reshuffled, as Gu Gang, chairman of the State-owned Hainan Development Holdings was appointed executive chairman of HNA, while Ren Qinghua, director of the Hainan Yangpu Economic Development Zone, was appointed co-chief executive. Co-founder Chen Feng is staying on as chairman.
The move has been widely interpreted as a government takeover of HNA, though a closer look at the situation suggests the story is far more complicated.
Like many of China’s conglomerates that appear to have emerged from nowhere within a short period of time, the rise of HNA follows a similar trajectory, fueled by aggressive borrowing and leveraging.
Established in 1989 as a State-owned company administrated by the Hainan government, HNA grew out of Hainan Airlines, which was turned into a joint stock company in 1992 and started to operate its first route between Beijing and Haikou, Hainan’s provincial capital, in May 1993.
Almost from the start, HNA Group embarked on a path of expansion and acquisitions with the support of local government and banks, with its first acquisition in 1993. After a few years when it expanded into airport operations and aircraft leasing, Wang Jian, co-founder of Hainan Airlines, brought in George Soros as an early investor in 1995, making the airline the first joint venture in the aviation sector. This paved the way to eventually build the company into China’s fourth-largest airline.
Due to the SARS outbreak of 2002-03, Hainan Airlines, like all Chinese airlines, experienced major disruption, after which the company decided to diversify. In the following years, HNA went on a buying spree, entering into industries including heavy machinery, securities, real estate, shopping malls and hotels. From 2010, HNA ventured further overseas markets, making some 40 acquisitions with a total value exceeding US$40 billion.
In 2015, HNA made the Fortune 500 list for the first time. With assets of US$89.9 billion, it ranked 464th. Chen Feng, HNA’s co-founder and chairman at the time told domestic media that he envisioned HNA would rank in the top 100 on the Fortune 500 list within five years, and among the top 10 within a decade.
Chen was not bragging. In under two years, HNA doubled its total assets. Some of its high-profile acquisitions in 2016 included a US$10 billion deal to buy the aircraft leasing unit of CIT Group, a US$6.5 billion deal to buy a 25 percent stake in hospitality group Hilton from Blackstone, and purchased electronics distributor Ingram Micro for US$6 billion. With total assets of US$173 billion, HNA’s rank on the 2017 Fortune 500 list surged to 170.
HNA is just one of many Chinese conglomerates that embarked on overseas expansion at the same time, helped by a liberal monetary policy. In 2016 alone, Wanda, HNA and Anbang Insurance, three of China’s biggest conglomerates, spent over US$50 billion gobbling up assets around the world.
But as the boom was predominantly driven by aggressive financial leveraging, the mounting debts accumulated by these acquisitions led to serious concerns over the systemic financial risks it posed to the stability of China’s overall financial system.
In 2017, China’s financial regulators started tightening domestic credit conditions. In June 2017, China’s banking regulator ordered banks to conduct a risk analysis on their credit exposure to HNA, and other major conglomerates such as Wanda, Fosun and Anbang.
This effectively terminated the credit line of these companies. Almost immediately after its massive acquisitions in 2016, HNA’s expansive strategy was replaced with a downsizing one in 2017, as the company started to sell many of its global assets.
But the real turning point was the mysterious death of Wang Jian, HNA’s co-founder and chairman on July 3, 2018, during a holiday in the South of France.
Wang, 57, was reported to have plunged to his death from a high wall in the Provence village of Bonnieux while taking photographs. Despite speculation that Wang committed suicide or that he was killed for “knowing too much,” French authorities ruled his death an accident.
After Wang’s death, Chen Feng, who was ousted from HNA as a result of an internal struggle between him and Wang, returned as chairman of the group. In contrast to his earlier ambitious goal to have HNA become one of the world’s top 10 firms, Chen withdrew HNA from the Fortune 500 list in 2018, and decided to return to HNA’s core aviation industry.
It is estimated that in 2018, HNA sold more than US$70 billion of assets covering a wide range of sectors. Yet this failed to alleviate the company’s debt problems.
According to the company’s half-year report in 2019, the company’s total debts amounted to over US$100 billion. By contrast, it had only 40.5 billion yuan (US$6.5b) in cash reserves. It also reported a net loss of 3.52 billion yuan (US$506m) in the first half of 2019, down from a net profit of 4.17 billion yuan (US$600m) in the same period of 2018.
For some observers, the fact that the government has sent a working group to address HNA’s debt problems means that HNA has been effectively taken over by Hainan provincial authorities, thus making it a State-owned company.
But most analysts believe the issue is more complicated. Given HNA’s colossal debt levels, the Hainan government does not have the financial resources to take over the company without financial backing from the central government. In 2019, the revenue of Hainan government from local sources was 81.4 billion yuan (US$11.6b), only a fraction of HNA’s existing debt.
There is speculation that HNA’s core business, Hainan Airlines, will be carved up and sold to China’s other major airlines, Air China, China Eastern and China Southern. But as all airlines are facing similar financial woes amid the coronavirus outbreak, this solution remains a distant possibility.
HNA still owns smaller local airlines including Hong Kong Airlines, Tianjin Airlines, Beijing Capital Airlines, Urumqi Air, West Air, Lucky Air and GX Airlines. In 2019, some of these airlines have been negotiating with local governments aspiring to have an airline hub to aid their restructuring goals. But the Covid-19 crisis is likely to put the restructuring of these airlines on hold for some time.
At a press conference on February 18, Ren Hongbing, deputy director of the State-owned Assets Supervision and Administration Commission of the State Council told media that as the entire economy is in jeopardy with the coronavirus pandemic, it is not a good time to push for the restructuring of airline companies. Ren said that the commission’s focus on the aviation sector is on how to mobilize and coordinate airlines to support China’s efforts to contain the coronavirus crisis.
Ren’s remarks are interpreted as a sign that the central government will not take over the HNA Group, and the company’s future is not among its policy priorities. As the coronavirus pandemic continues to rage on with no sign that it can be contained anytime soon, and as international aviation is halted, the days of the once formidable HNA Group may be numbered.