Hainan Airlines Bankruptcy Bottom Line

Hainan Airlines, and its parent the HNA Group, have been forced into bankruptcy proceedings by their creditors. The Hainan Airlines bankruptcy will be overseen by the bankruptcy court in Hainan Province. The Court in the southern province where Hainan Airlines is headquartered will begin the process to force a restructuring of the company moving forward. This a last-ditch effort to save the once-booming conglomerate. 

 

HNA Group History

The HNA Group was one of China’s largest conglomerates. They started off humbly, with Hainan Airlines. The company expanded both their Hainan Airlines holding, by adding more subsidiary carriers across China, and their overall holdings throughout the world. HNA once had partial ownership of entities such as Hilton Worldwide, Deutsche Bank AG, and other smaller airlines throughout the world (such as Azul in Brazil). 

The expansion was fueled by acquiring piles and piles of debt. At one point, the Chinese central government became worried about the long-term viability of the company taking on so much debt. At its peak, the group had assets in excess of US$400 billion. The group had already begun restructuring under the auspices of the central Chinese government even before the pandemic took a toll.

 

And then the Pandemic Hit

The COVID 19 pandemic took a major toll on Hainan Airlines. It was hit heavier than most other local Chinese carriers given that the bulk of their passengers came from their international flights. When borders were closed, the airline’s primary source of revenue dried up. The government authorities were faced with a difficult situation: how to go back to the group’s core competencies when the source of those competencies was restricted? The most recent fiscal year 2020 results show that the group had lost over US$2 billion. 

What can we Expect?

At this point, I am not fully sure what the creditors want. The going concern value of the airline is heavily dependent on travel returning. We all know the future is uncertain in global air travel, how much recovery would Hainan Airlines need to exit bankruptcy is still unknown. My intuition is that the creditors, in order to obtain some recovery, will force the airline to trim down substantially. Their subsidiaries will likely be spun off and sold to other groups. Don’t be surprised if some of the larger Chinese carriers (like China Southern and Air China) pick up some of the distressed carrier’s assets. 

As for Hainan Airlines itself, it has already been defaulting on aircraft loans and returning aircraft to lessors. This will only be accelerated due to financial difficulties. Whether we see Hainan Airlines return as a smaller carrier, such as how South African Airlines is being forced to trim down, or if we will see it disappear completely is still an open question. It was once one of the premier airlines in China: the only one with a Skytrax 5 Star Rating. 

 

Landing Thoughts

A company that expands quickly by piling on debt is always suspect to what can happen in the future. The HNA Group’s fall from grace is a warning sign to other ambitious companies about how using debt for financing can go very wrong, very fast. Now under the influence of the bankruptcy court, how will Hainan Airlines come out will be dependent on its creditors. Whether it’s liquidated, trimmed down, or their debt is restructured is still an open question. Only time will tell if Hainan Airlines will fly off into the sunset. 

HT: South China Morning Post 

 

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