Since the launch of Hainan Airlines in 1993, China's HNA group (formally founded in 2000) has expanded from aviation to logistics, tourism, financial services, real estate development and other industries to “build a full-scale strategic value chain.” It has a dozen subsidiaries including HNA Aviation, Grand China Logistics, HNA Capital,HNA Holdingand HNA Tourism. At the end of 2012, it had total assets of 360 billion RMB (US$ 58 billion), annual revenues of 126 million RMB (US$20 million)and 120,000 employees.
Chen Feng, 60, chairman of the HNA Group, was formerly a government official with the Civil Aviation Administration of China (CAAC) and the National Air Regulations Bureau. He launched Hainan Airlines in the early 1990s when he was aviation business assistant to the provincial governor of Hainan, China's the southernmost province. Hainan Airlines is the country's fourth-largest airline.In 1995, billionaire financier George Soros invested in Hainan Airlines, making it the first civil aviation joint venture in China. In an interview with China Knowledge at Wharton, he discusses his group's M&A strategy for expansion and the next steps in its "going global" program.
Below is an edited version of the interview:
China Knowledge at Wharton: How do you expect the global economy and the economy in China to fare in 2013? How will those trends shape the focus of the HNA Group?
Chen Feng: I do not expect the global economy to experience strong growth this year, nor will it see further recession. China is likely to experience structural reforms to change its growth engine. Modern services industries will have a lot of potential for growth, supported by government policies to upgrade urban and rural lives.
The HNA Group will keep its focus on the modern services industry and develop its businesses around several "core" businesses we have identified internally. Of those core businesses, aviation, tourism and commercial services are the hotspots of future consumption.
China Knowledge at Wharton: What is the outlook this year for the Chinese aviation industry?
Chen: We expect the domestic aviation market to keep a relatively stable pace. Its growth rate will ease to some extent, mainly because of two reasons: its [relatively] high base [achieved over] the past years and the increased influence of the high-speed railway in China.
For the global aviation market, the outlook is highly uncertain. Therefore, we are thinking of slowing down our expansion in global markets. For example, we have been talking with Airbus to revise our order of 10 Superjumbo A380s. It was booked by Hong Kong Airlines (a subsidiary of the HNA Group) and was originally expected to be delivered by 2014. We are now talking with Airbus to postpone delivery or change the order to smaller airplanes.
China Knowledge at Wharton: In recent years, you have actively pursued M&As not just within China, but also in the global market. What is your strategy to expand overseas?
Chen: Since the global financial crisis in 2008, overseas stock markets have shrunk dramatically. Some countries have lowered their investment threshold for foreign capital. Many companies have offered assets or equities at much lower prices than earlier.
In this context, the HNA Group has accelerated its pace to implement its “Going Global” strategy and accomplished many critical M&As in aviation, lease financing, logistics, tourism and other sectors in recent years. (In 1999, the Chinese government launched a "Go Out" policy that encourages Chinese companies to invest overseas.)
Globalization is the way we must go in order to become an enterprise with world-class excellence. M&A will continue to be an important strategy for our future growth.
China Knowledge at Wharton: What are some of the major deals of the HNA Group in outbound M&As?
Chen: In 2011, we invested US$27 million to acquire ACT Cargo Airlines in Turkey and US$1.05 billion to buy GE SeaCo, General Electric's container leasing subsidiary. We concluded two more major international investment deals in 2012, when the global aviation market was at a low. One was to team up with the China-Africa Development Fund to establish an aviation company in Ghana. The other deal was to buy 48% of the equity of the French airline Aigle Azur, where we are now the second biggest shareholder after the GoFast Group of France. That was the first time a Chinese company invested in a European airline.
The motive in setting up an aviation company in Ghana (Africa World Airlines) is to tap into the huge potential for the airline industry in emerging markets like Africa and Russia. At present, Hainan Airlines is the only Chinese carrier in Africa and it also enjoys the most air routes in the China-Russia market.
By investing in French airlines (such as Aigle Azur), we can get approvals for international air traffic rights, which are usually very difficult for Chinese carriers. We can also achieve better integration with domestic flights by leveraging this acquisition.
In the future, we will keep “going global.” Currently, overseas assets and revenues account for around 10% of our group's total. We plan to increase that to 30%-40% in the next five-to-10 years.
China Knowledge at Wharton: The HNA Group has been more aggressive than other Chinese airline companies in going global. What are the major motivations for this?
Chen: China has the second-largest market for airlines, but we are not the strongest in the industry globally. The HNA Group will be more active in global markets for the following reasons:
First, our regulators, especially the CAAC, are willing to support us, since we are a relatively flexible company to experiment with such missions. Our shareholder structure makes possible market-driven and efficient decision-making.
Secondly, I believe we are capable and efficient in managing complicated global integrations. Hainan Airlines has adopted global benchmarks and connected with the international capital market from the very beginning. In terms of internal management, it has set up global-standard operational systems and strengthened talent training for our global expansion.
China Knowledge at Wharton: What are your targets in global M&As?
Chen: First, we give preference to developed countries with a mature market economy mechanism, a mature legal environment and an eagerness to attract foreign capital. Secondly, we will choose developing countries that offer sustainable resources and strong potential for growth. We also value countries that enjoy geographical advantages like Turkey, which would help lay the foundation for our future global footprint. In terms of industries, we focus on the modern services industry to create synergies with our domestic business.
China Knowledge at Wharton: What are the main challenges in executing overseas M&A deals?
Chen: As of today, the HNA Group has 20 entities overseas. However, I think our globalization is at a very early stage. The legal and operational environments in foreign countries have demanded new requirements of our own capabilities. Meanwhile, outbound M&As require a lot of management talent that knows local markets well. On top of these, when new companies join our group, we need to integrate them within our culture and institutions. All of these require further practice and improvement.
China Knowledge at Wharton: Three of China’s biggest airlines and some regional ones have joined international airline alliances. Why has Hainan Airlines not done that yet?
Chen: Although Hainan Airlines has not joined any of the international airline alliances, we are willing to cooperate with any airline in the world and extend our market much further.
For example, in 2012, Hainan Airlines successively developed code-sharing agreements with American Airlines and Etihad Airways of the UAE, which have benefited us greatly. One of the outcomes is that Hainan Airlines has a market share of more than 48% in the Beijing-Seattle route.
At present, Hainan Airlines relies mainly on bilateral transport agreements, which include code-sharing, mutual sales of tickets and cooperative flight products, in its global alliances. As of mid of 2012, it had established bilateral flight agreements with 103 international airlines, 10 code-sharing partnerships on 38 routes and agreements for mutual-sales of air tickets in more than 70 countries.
China Knowledge at Wharton: What are some other strategies for the HNA Group to grow?
Chen: Innovation. Hainan Airlines became the first joint venture airline in China when it attracted the investment of George Soros back in mid-1990s. We were also the first to realize the value of niche segments. When major airlines are still fighting with each other in the mainline markets, we are focused on cultivating regional routes and corporate aircraft services.
In addition to the aviation industry, we have been exploring novel business models in other areas. For example, the "finance lease" is an emerging format in financial services in China in recent years (Editor's note: In a finance lease, the lessee gets the risks and rewards associated with the ownership of an asset, while the actual ownership lies with the finance company.) The HNA Group has launched several companies to offer financial leases for municipal infrastructure, aviation and shipping.
China Knowledge at Wharton: M&A has been an effective strategy your group's rapid expansion. However, the global economy is still struggling and China's growth is also slowing down. How do you avoid the risks in digesting the deals?
Chen: We have been fast in implementing M&A deals in the past. However, we have been slowing down our pace and now focus more on internal integration of resources and business units to strengthen our core competitiveness. For example, in 2011 we began an internal integration exercise in restructuring M&A projects and make decisions based on their performance.
The restructuring process is still underway. As of today, we have closed more than 300 companies and merged parts of their businesses into major units. We have contracted our core business units from eight to five (aviation, logistics, finance, commercial services and tourism). In 2012, the group’s total revenues were RMB126 billion, 17% higher than a year ago, and its debt level dropped 0.3% from 79% of total assets in the same period.
In short, we have consolidated and strengthened our business in the past year and we will continue to do so this year. However, I know we still have a long way to go to build an enterprise of “world-class excellence.”
China Knowledge at Wharton: What must the HNA Group achieve to become an "excellent" enterprise?
Chen: I think there are three criteria. First, our revenue has to reach the scaleof top 100 ofFortune 500 companies, which is between 600 billion and one trillion yuan (US$100 billion-US$160 billion). Second, we should have a strong corporate culture to create world-class brands. Third, we have to assume our social responsibilities in human welfare. The corporate mission to make profits will sometimes conflict with public interests. Our corporate culture is to try and integrate these two interests. We will not damage public benefits for our own business interests.