China’s HNA Group poised to buy 13% stake in Virgin Australia

In a bid to strengthen its position in the Chinese airline industry, HNA Group intends to make an investment of AU$159 million (US$114 million) in the acquisition of a 13% stake in Virgin Australia. Currently HNA Group’s airline, Hainan Airlines, has no scheduled flights to Australia, unlike state-backed China Southern and China Eastern. According to Hong Kong-based Eric Lin, Director of Asia Transport Research at UBS, “The China-Australia market is buoyant and you can expect to see more capacity in the coming months.”
The move comes as part of HNA Group’s push to invest US$10 billion in overseas aviation-based enterprises. HNA Group agreed to acquire a 23.7% stake in Azul Brazilian Airlines for US$450 million in November last year, while in May this year it agreed to purchase a 7% stake in Atlantic Gateway, part owner of TAP Portugal, in which HNA Group already holds a stake. In January, the Group’s Bohai Leasing business bought the leasing firm Avolon, giving them access to over 500 aircraft. This week HNA Group also announced its entry into negotiations with Air France-KLM to buy a stake in its Servair catering business.
HNA Group also plans to extend its holding in Virgin Australia up to 19.9% at a time when Air New Zealand is selling its currently its undiluted 25.1% stake in the airline. It has not been disclosed why HNA Group chose not to simply buy the Air New Zealand shares. HNA is paying a 7.1% premium of US$0.30 per share based on Monday’s closing price.
According to HNA Group, “We are excited to support the Virgin Australia Group through our investment and the strategic alliance. We look forward to working together to create a seamless travel experience between Australia and China, and to deliver further choice, value and excellence to travelers worldwide.”
John Borghetti, Virgin Australia Group CEO, is quoted as saying: “In 2015, over one million Chinese travelers visited Australia, spending approximately AU$8.3 billion in total on their journeys. By 2020, almost 1.5 million Chinese travelers are projected to visit Australia in a market expected to be worth up to AU$13 billion. We are pleased to welcome HNA as a new shareholder and strategic alliance partner. The alliance will see us leverage the opportunities offered by China, as well as the synergies of HNA’s comprehensive aviation supply chain.”
The deal will require approval from Chinese aviation authorities as well as the Australian Competition and Consumer Commission. Virgin Australia is the second-largest airline in Australia with approaching a 36% share of the Australia market. On top of the existing Air New Zealand stake, Singapore Airlines holds a 25.9% stake in Virgin Australia, while Etihad Airways holds a 25.1% stake, and the Virgin Group an 8.7% stake.