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Jul 25, 2017

HNA credit crackdown signals bigger risks for Australian interests

HNA's capacity to invest more in airlines including Virgin Australia has been put in question by overseas reports

Ben Sandilands — Editor of Plane Talking

Ben Sandilands

Editor of Plane Talking

Hainan Airlines 787-8 Dreamliner

Reports that major China banks have lost their enthusiasm for lending  funds to the PRC’s HNA Group 海航集团有限公司 (which has a more than 19 percent stake in Virgin Australia Holdings) can be read as unsettling news for the Australian airline.

But it could also add to the unease about changes in economic policy in Beijing that could have much broader and potentially more damaging impacts on the Australian economy.

The airline interests of HNA, including Hainan Airlines  and Hong Kong Airlines, have not as yet, been as active in expanding in their own right into the Australian market as had been anticipated when the investment in VAH was announced last year.

To date the heavy lifting in the VAH/HNA relationship is being done by Virgin Australia, which is committing almost all of its wide body A330 capacity to serving Hong Kong, and in due course (details remain vague) in direct flights to cities in the PRC.

This will see Virgin Australia rely on single aisle 737s for transcontinental domestic flights in the Perth market, when its refurbished and popular A330s are largely redeployed on to the new international services. Making its 737s competitive against the refurbished A330s Qantas is using for the major Perth flights is problematical, and the more so as the only statements from Virgin about this issue has been to boost but without any detail, an all new business class product for its single aisle jets which would be needed now rather than some time next year.

It is probably not the right time for Virgin Australia to be throwing money at a business class market using single aisle jets where Qantas continues to dominate that premium market with wide body jets.

A downturn in China’s economic activity in general would not only directly harm Virgin and Qantas, but the real estate market and Australia’s mineral and agricultural exporting interests.

Given the risks Australia’s major airlines face from a possible if not probable recession in China, the better prepared carrier would obviously more readily survive the ensuing dislocation.

On the other hand, if HNA Group can’t handle a possibly impaired investment in VAH, that could dislodge a one fifth equity in the Virgin operation that might very useful in any attempt by other equity holders Etihad or Singapore Airlines to secure outright control of Virgin via its holding company.

Virgin Australia is going to Hong Kong, and later China, to participate in the obvious upsides in those markets. It could yet find itself hostage to more immediate downturns.

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