HNA may be starting to rethink its airport investment plans

2 January, 2018

China's HNA group, despite only having been founded 17 years ago, is considered to be one of the most active investment companies in the world and was ranked this year as 170th in the Fortune Global 500 list. A true conglomerate, it is involved in many sectors, including aviation, real estate, financial services, investment banking, retailing, tourism and logistics. It owns 25% of Hilton Worldwide and is a part owner of Grand China Air, the parent company of Hainan Airlines and its subsidiaries.

Indeed, through HNA Aviation, it is affiliated with 13 Chinese airlines, while holding stakes in foreign airlines in Asia, Africa, Europe and Latin America as well as being the instigator of the U-Fly Alliance of low cost airlines.

In the airport sector, HNA has been just as active. HNA Airport Group operates 16 airports across China, the most significant being Haikou Meilan International, which serves the capital of the Hainan province. It is providing construction, operation and management consulting services for the construction of the New Sanya Airport.

HNA began to show interest in foreign airport investment a decade ago when it bid for a 27.65% minority shareholding in Brussels South Charleroi Airport. At the time it was reported that HNA executives were "scouring Europe" for airport investment opportunities.

It didn't take them long to return, HNA declaring that It was aiming for overseas assets to make up two-fifths of its total assets in 3-5 years. Starting with the UK's BAA in 2011, the list of airports and airport groups - big and small - that HNA has bid for or at least "shown interest in" also includes Hochtief Airports, Ciudad Real Central Airport in Spain, Manchester Airports Group, London City Airport and Glasgow Prestwick Airport.

However, only deal has come to fruition. In Aug-2017, HNA Group, in association with the German ADC GmbH, completed the acquisition of an 82.5% equity interest in Frankfurt Hahn Airport from the state of Rhineland-Palatinate in a transaction valued at EUR15.1 million. HNA Group sees the airport as a leading hub of commerce between China and Europe in support of China's 'One Belt One Road' initiative.

CHART - HNA Group, in association with the German ADC GmbH, completed the acquisition of an 82.5% equity interest in Frankfurt Hahn AirportSource: CAPA - Centre for Aviation

With this acquisition HNA achieved the accolade of being classed as a 'Major Global Investor' in the CAPA Global Airport Investors Database, which requires at least one foreign airport investment out of a minimum of five invested airports. Separately, HNA Group has acquired ground handler and caterer Swissport International and took a stake in airport retailer Dufy.

However, it may all be starting to unravel. As long ago as 2011, HNA Group was denying reports that it was operating at significant losses owing to the plethora of merger and acquisition deals it had been involved in. Even then its asset/debt ratio stood at 1:9.

Since 2016 it has been on a USD40 billion debt-fuelled acquisition spree across six continents that included a stake in Deutsche Bank and within the last few weeks HNA Group has been forced to counter financial concerns. Its financial health came under scrutiny this year after Chinese regulators acted against private companies moving money out of China. HNA has extended the repayment period for a loan from Swissport, to another affiliate and has delayed payments to aircraft lessors, raising concerns about the group's liquidity.

HNA is among a group of Chinese companies facing scrutiny after a flood of aggressive overseas investment, as the government seeks to stem capital flight from the country. Denied further loans by at least three Chinese banks it has turned to online financing platforms in China to raise money for operations and intends to conduct an IPO of Gategroup Holding in early 2018 and float around 50% of the company.

The company felt obliged to issue a statement that it will not default in 2018, pointing to difficulties arising from has several bonds and loans from multiple banks maturing at similar times, causing a "temporary liquidity" issue. However serious the problems, there does appear to have already been an impact on HNA's aspiring airport investments. It appears to have lost out to Singapore's Changi Airport Group to acquire Odebrecht's 51% share of RIO galeão, the concessionaire responsible for Rio de Janeiro Galeão International Airport. It is also dropped out of a proposed consortium bid for the 25-year concession of Belgrade Nikola Tesla Airport.

The future for HNA in this sector is difficult to predict accurately. It said at the time of the Hahn airport acquisition that it had a "very high economic risk", and that "we do not give any guarantees for the jobs". It is a "company that needs to be restructured to survive in the future" with an investment backlog up to EUR75 million. Which means yet more debt for HNA.

HNA, having played around the sector for the best part of a decade, is finding out the hard way that airport investment is perhaps a riskier business generally than it envisaged and now that every transaction is being examined in great detail and the vultures are circling it is possible it will go the way of other big name, multiple airport owning or leasing investors like Abertis and Macquarie Airports and retrench back to its home base (Macquarie) or even exit the business altogether (Abertis).