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JULY 2019

Week 28


Hong Kong Airlines prepares new strategy, investors

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July 12th 2019

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Court dismisses shareholder dispute, which should expedite Cathay-HK Express deal. Read More »

Hong Kong Airlines (HKA) wants to make up for lost time now that it is free to restructure its business and potentially introduce new investors. A sealed court order dismissed the shareholder dispute and discharged the injunctions against HKA directors, the airline said.

The outcome implies faction leader and shareholder Zhong Guosong has privately settled with HNA. Zhong is also a shareholder of HK Express (HKE) and had opposed the sale of the airline to Cathay Pacific. His official reasons varied, but seemed to leverage HKE as part of a wider strategy. Industry observers said Zhong had not been and does not want to be hands on at the airlines, implying he was after better financial terms. Cathay did not have any comment about the HKE acquisition moving forward.

Since June, HKA has received capital from undisclosed sources, according to local media. HKA has been able to pay Rolls-Royce the US$50 million it has owed to the engine OEM for three years. Local media speculated HKA could acquire a new investor, but did not state possible companies or industries. An HKA spokesperson said: “We are always open to strong strategic investors.”

The court dismissal could be a formality and face-saving tactic for Zhong. Zhong and HNA had been negotiating a settlement for nearly two months, a complicated period where attempts were being made to broker a deal while the parties still appeared in court.

HKA had no announcements about change of ownership at its various subsidiaries. There were discussions Zhong could be given ownership of certain HKA-related subsidiaries, ranging from cargo to ground handling.

Restructuring has started at HKA on a small scale, with the airline planning to acquire three A320s to replace three A330s. HKA did not comment if other aircraft would leave the fleet without replacement.

HKA’s restructuring task has become more complicated. It needed to address the long-haul network it quickly developed without sufficient regional feed, leading to an imbalance.

Cathay’s acquisition of HKE means HKA needs to think more holistically about its market positioning. HKA and HKE did not have a formal dual-brand strategy nor were they aggressively competing with each other. Instead they tried to find different market segments in an uncoordinated way that at times saw them overlap to their mutual detriment. Cathay would have been significantly impacted if HKA and HKE aligned their strategy or a new shareholder bought both. By acquiring HKE, Cathay puts in a wedge.

HKA chairman, Hou Wei, joined the airline last year from the HNA group. Observers have criticised HNA for trying to apply a copy-and-paste model onto HKA as if it were one of HNA’s mainland units like Hainan Airlines. Amongst many differences, those airlines are more point-to-point without needing strong feed. They exist in a regulated market, whereas HNA could use HKA to exploit Cathay’s weaknesses and satisfy market demand for another competitive option.

Hou is said to be aware of HKA’s fundamentally different market position. In his short tenure, Hou has shown more interest in employees than previous HNA managers. He needs to reinvigorate staff, including a number of experienced former Cathay employees that want to see a successful and more efficient network airline.

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