August 27, 2012 3:41 am

HK Airlines ambitions hit turbulence

The owner of Hong Kong Airlines compares it to a wayward child sent to the headmaster’s office. The trouble that the six-year-old carrier is in will “help it grow up”, says Chen Wenli, board director of Hainan Airlines Group (HNA), the Chinese state-controlled conglomerate with global ambitions.

The airline is lucky to have an indulgent parent that has pledged unconditional support in spite of a very bad year. Hong Kong Airlines is scrapping an all-business class service to London after just six months. It has been rapped on the knuckles by Hong Kong’s aviation regulator. Its poor handling of weather-related disruptions last month resulted in a huge backlog of very angry passengers. The carrier has admitted it may have to abandon its already long delayed plan for a public listing in the territory. It has even incurred the wrath of animal rights groups along the way.

Its struggles in part illustrate the difficulty of breaking the domination of local flag carrier Cathay Pacific Airways and its affiliate Dragonair, which together account for around half of the traffic out of the world’s third busiest passenger airport. But its recent woes also put the focus on its opaque parent’s ability to keep a tight rein on a fast expanding global empire.

Hong Kong Airlines has launched routes in the past that industry experts consider to be non-mainstream and unlikely to attract sufficient demand, says an aviation analyst who requests anonymity because Hong Kong Airlines is a privately held company. “It is a mystery how the parent group keeps funding these failed experiments,” he says.

HNA’s main shareholder is the provincial government of China’s Hainan Island. Despite the state’s backing, there are concerns about the financial health of the group because of an aggressive acquisition strategy that has included investments in emerging markets airlines and a $2.5bn purchase of General Electric’s container leasing unit last year. Grand China Logistics, a HNA shipping unit, has been sued by numerous international creditors for owing millions of dollars in charter and fuel costs. Yet “HNA is in sound financial health,” Mr Chen insists.

Hong Kong Airlines, which currently has a fleet of 26 aircraft, surprised industry watchers in January when it ordered 10 Airbus A380s – the world’s largest passenger aircraft – at a total list price of $3.8bn. That took its outstanding orders to 55 aircraft, according to aviation consultancy Ascend Worldwide. The Airbus order also attracted attention because of rumours that China has banned its airlines from buying from Airbus in retaliation for new EU emission charges. But this month [the airline said it might cancel the order because it no longer planned to run long-haul services.

Its first long-haul destination was Moscow, an unusual route that was cancelled in January after a year and a half. Then, in March, it rolled out the first all-business class Hong Kong to London route at half the price charged by Cathay Pacific. Losses on the route led to a 50 per cent fall in interim net profit from a year ago.

“Anyone pitching themselves at the premium end of the market is going to struggle in this economic climate,” says Tim Ross, head of Asia Pacific transport research at Credit Suisse. “Also, it offers none of Cathay Pacific’s soft benefits like air miles that can be used for other airlines and it has no link to the corporate world.”

Mr Yang promises that a fresh recruitment drive and a new system of back-up aircraft will help it cope with bad weather in the future. But there are other issues management must address. The Hong Kong Civil Aviation Department last month banned the airline from operating additional planes until it proves its organisation, staffing and maintenance have kept pace with its rapid expansion.

The carrier’s reputation also suffered earlier in the year when it was condemned by global animal rights activists for transporting five live dolphins from Japan to Vietnam in a small confined space with half their bodies exposed to air. Protesters say the consignor might have captured the dolphins in Taiji, the notorious site of an annual dolphin slaughter featured in the Oscar-winning documentary “The Cove”. The company apologised after pictures of the dolphins in transit were published by local media.

For now, at least, Mr Chen says HNA will continue to bankroll the Hong Kong carrier. Analysts say Hong Kong Airlines can help HNA in various ways. There is less bureaucracy involved in aircraft orders in Hong Kong, and the territory is also an easier place in which to raise US dollar funding than in mainland China and a good springboard for expanding the group’s international presence, says Su Baoliang, an analyst at Citic Securities in Beijing.

“You have to look at this young company from different points of view. Hong Kong should have faith in it. It won’t let you down,” Mr Chen says.

Related Topics

Copyright The Financial Times Limited 2015. You may share using our article tools.
Please don't cut articles from FT.com and redistribute by email or post to the web.

NEWS BY EMAIL

Sign up for email briefings to stay up to date on topics you are interested in

SHARE THIS QUOTE