Will the HNA Airline Empire Finally Fail?

Hainan

Long before the coronavirus decimated travel to China, HNA Group was in trouble. It had overspent not just on airlines, but on a variety of companies all over the world. The coronavirus just made things worse for the teetering conglomerate, and now it appears that the end may be near. If reports are correct, HNA Group will be taken over by the government, and its airline assets will all be sold off. Today, I’ll take a look at the airline side of group in a little more detail with a focus on the US.

HNA’s structure makes Norwegian almost seem uncomplicated, but let’s see if I can untangle this. Here’s the best I can do for now with the ownership stake displayed in parentheses:

  • Hainan Airlines (100 percent)
    • Beijing Capital (73 percent)
    • Fuzhou (60 percent)
    • Grand China Air (23 percent)
      • Changan (83 percent)
    • Lucky Air (87 percent)
    • Suparna Airlines (maybe 45 percent?)
    • Tianjin (100 percent?)
      • GX Airlines (70 percent)
    • Urumqi (70 percent)
    • West Air (?? percent)
  • Guilin Aviation Tourism Group (100 percent?)
    • Air Guilin (40 percent)

Let’s just call that close enough. I’m really not sure about some of those percentages, nor am I sure of how many still fall under Hainan Airlines versus under the HNA Group parent. It’s all confusing.

But wait, there’s more. Outside of mainland China, HNA has investments in Africa World Airlines, Azul, Comair, Hong Kong Airlines, MyCargo, TAP Air Portugal, and Virgin Australia. It also had a stake in Aigle Azur until that airline failed. I’m going to ignore all of these for now as just ways to move money out of China. Let’s look at the Chinese operations in more detail. Update: HNA sold its stake in Comair in 2018.

Most of these airlines were started as joint ventures with provincial governments and private, outside investors. Those provincial governments wanted to get more air service, so they poured money into these little airlines that had their own names on them. Below, you’ll find scheduled daily flights by airline thanks to Diio by Cirium data.

Hainan is by far the largest with almost a third of the group’s operations. Tianjin is next, but it is largely regional with several hubs in China including Tianjin (obviously), Xi’an, Haikou, and Urumqi. Outside of Asia, it only serves Melbourne, Moscow, and London. Beijing Capital has a similar structure, but it has a slightly larger long-haul network which includes Vancouver and Male in addition to Europe and Australia. No other airline in the group flies outside of Asia. Here’s a long-haul map:

June 2020 HNA Routes via Diio by Cirium

All those red routes are operated by Hainan, and that’s the only group airline that flies to the US, so that’s where I’ll drill down further. At least from a US perspective, Hainan does not perform well.

I looked into the ARC/BSP data via Diio by Cirium to take a look at average fares between the US and mainland China for all of 2019. Here’s what that looks like.

What’ll you’ll notice is that there is a wide disparity in performance, and it’s those airlines that serve Beijing and Shanghai most that do the best. Sichuan and Xiamen are awful performers, and that isn’t a surprise since all their US flights touch tertiary cities. China Southern does somewhat better, but that’s because it serves more secondary cities. It still doesn’t do well.

Side note: Look how poorly American does. That’s LA for you. Now back to our regular programming.

Now take a look at Hainan. You might be surprised to see that Hainan carries more passengers than China Eastern and China Southern. In fact, it’s in fourth place behind United, Air China, and Delta. You’d think that it would have grown its volume, because it was performing well, but that’s definitely not the case. Those fares are low.

A big part of the problem is that Hainan was late to the game. China has a policy of only allowing one of its airlines to fly each route, so that makes it tough for a newer entrant. With Air China and China Eastern snapping up all the good routes, Hainan was left with scraps. Here’s what it flies.

Hainan US – China Map generated by the Great Circle Mapper – copyright © Karl L. Swartz.

All those routes in red go to secondary or tertiary markets in China, and those are bound to do poorly as we discussed. Sure, there’s government money propping those up to some extent, but these routes will never survive on their own. The ones in green at least touch Shanghai and Beijing, but in the US they are not key markets. Those are already taken.

This is small snapshot of the HNA Group network, but it’s very telling. It shows an airline operation that grows at all costs, regardless of performance. So, the HNA airlines continue to flounder. The chaotic strategy of building up many partners and flying them regionally to take advantage of subsidies was bound to come crashing down at some point. It’s high debt and large number of seemingly-unrelated investments was never going to be sustainable. With coronavirus making travel to China disappear nearly overnight, it put the group of airlines that were already in bad shape into even worse shape.

Breaking up HNA’s airlines and divvying up the parts to existing players makes the most sense. The reality, however, is that many of these routes should just disappear along with the airlines that fly them.

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17 comments on “Will the HNA Airline Empire Finally Fail?

  1. Excellent analysis.
    covid 19 (corona virus) combined w/ already weak economics will lead to a hard reset of aviation in E. Asia, esp. in light of the spread of the virus to Japan and S. Korea as well as more heavily Chinese-oriented markets such as Hong Kong and Singapore.
    The Chinese government can backstop some losses and facilitate mergers but the whole region was on track precisely for a major restructuring of which the HNA group is a major part but certainly not all of what will take place.

    Again, well done on the analysis and reporting.

    1. I agree, great article. Love the global graphics.

      But I don’t think it’s going to be a hard reset, just a painful temporary blip forgotten about by June.
      Not a game changer or seismic change in Asia.

      Personally I still see Mainland China surpassing the North American aviation market inside the next 10 years.
      When you outsource the manufacturing of everything from furniture to iPads to the screen you are looking at now, China ain’t going to go away overnight.

      We can’t both be right, so let’s see what happens

  2. Wow… didn’t know HNA group was that large & considering what’s going on right now, I expect to see some of these names to pop up on this years “Airlines we lost in 2020” list in December.

    HNA sort of reminds me of AMC Theatres corporate parent, another Chinese conglomerate Wanda Group, with it’s hands in many entertainment segments as well as real estate development.

  3. Guessing some of those routes to the secondary and tertiary markets must have abyssmal load factors. Bad load factors combined with way below average pricing… Yikes!

  4. THIS is why you have the leading blog covering the Air Transport market. Phenomenal analysis, as always. While AA’s low average fare is not surprising, I’m pleasantly impressed that UA commands the highest average fare. Another example of how they continue to improve their operation.

  5. This situation has the ring of the post-deregulation, pre-consolidation era in U.S. aviation. There were too many airlines chasing too few passengers. Beginning around 2008, as reported by Peter Greenberg at the time, U.S. airlines took almost an entire airline’s worth of capacity out of the system. That sounds like what’s needed in China.

    1. True, but consider the fact that an entire airlines worth of capacity in China is so much larger than what was in the US after deregulation. It’s just incredible to rap ones head around that statement when you factor in all the moving parts.

    2. I slightly disagree.

      I work at DXB and prior-Corona, the amount of Chinese Tour Groups was increasing exponentially.
      I’ve waited at TPE/KHH/HKG Immigration as said Groups enter Taiwan.

      Not being offensive, but there are a LOT of Mainland Chinese and as we say in the North of England
      “Poor men learn rich men’s habits quickly”

      The Mainland Chinese love flying and exploring the world.
      The demand is not going away just because of virus hysteria

      1. Well demand won’t be disappearing, but those tour groups are generally not high-yield passengers so airlines relying on them for survival isn’t a great strategy. I suspect that in the next few years supply will better match yield and profit, rather than just concentrate on market share and filling seats.

  6. Good article. Note also that Swissport, arguably one of the largest airline ground handling companies in the world is also owned (100%?) by HNA Group. More implications here……

  7. Great analysis, Cranky. Very insightful into HNA. I’m interested to see what’s going to happen with Hong Kong Airlines. It was already nearing collapse until a bailout by HNA, which already had a large stake. Curious if the Chinese government will intervene or let it die on its own if that’s what the market decides.

  8. Counting our lucky stars that we visited China last October, using AS miles for a 50k o/w business class ticket to Beijing and home from Shanghai. Trip of a lifetime and we were glad we did it when we did. Coronavirus is killing China tourism and I feel badly for the HU crews and our guides on our trip. :-(

  9. yes please! we’ve waited long enough for this medieval empire that sells off organs of prisoners for profit to finally topple itself over once and for all.

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