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HNA buys 6.2% of South Africa's Comair

06/10/2015| 8:20:24 PM|

HNA Group made a USD13 million investment for a 6.2% stake in South Africa's Comair.

China's expansive HNA Group, including flagship carrier Hainan Airlines, is continuing its international acquisition strategy with a USD13 million investment for a 6.2% stake in South Africa's Comair, which operates a full-service brand under a British Airways franchise and a low-cost carrier, Kulula. Uniquely to recent airline acquisitions, Comair is well-run and profitable. The purchase has been made for less than half the cost of a narrowbody jet, making it perhaps relatively inexpensive.

The synergies between the parties are unclear. Comair does not fly outside of southern Africa while HNA no longer flies to Africa – and if it did, it probably would not need an investment stake to work with Comair, which is generally open to partnerships. HNA is an investor in Ghana's Africa World Airlines, but there are no network links (yet) between that airline and Comair.

The investment comes after HNA and Air China are understood to have looked at investing in South African Airways, although this was too politically difficult. Africa is a new theme for Chinese aviation, with growing air routes, airport infrastructure projects and placement of Chinese aircraft to African airlines and governments.

HNA investment in Comair another step in HNA's offshore excursions

HNA Group One BV, a Dutch company wholly-owned by China's HNA International, acquired 6.2% of South Africa's Comair, which operates as British Airways under a franchise agreement. HNA paid ZAR160 million (USD13 million) for the stake. The transaction occurred on 22-May-2015 and was announced on the Johannesburg Stock Exchange, where Comair is listed, on 26-May-2015.

HNA bought its shares from investment group Thelo Aviation, which has now fully disposed of its interest. Thelo bought into Comair in 2006 with a 16.1% stake valued then at ZAR137 million (USD21 million at the time). Thelo has reportedly made a ZAR160 million (USD13 million) profit on the deal.

Comair was the first investment for Thelo. Thelo and Comair anticipated that Thelo's ties could help Comair buy SA Express from the South African government, and to secure more of the South African government's travel budget. SA Express remains owned by the South African government. Thelo stated it would be a hands-on investor and was looking at long-term deals. "We have taken a view that we are going to be long-term shareholders and that we want to involve ourselves in the businesses which we invest in. We don't really want to be passive shareholders," Thelo part-owner Craig Lyons said at the time of the deal.

Locally in South Africa the deal has made some headlines in light of the government's recent changing policy on Black Economic Empowerment (BEE), which awards points to companies for their involvement with previously disadvantage races, notably blacks. Thelo selling its stake has not only left Comair without a BEE partner but introduced capital from HNA. Various African nations are growing wary of China's influence on the continent. Comair CEO Erik Venter told the Sunday Times the airline would not look for a BEE shareholder.

Ronnie Ntuli owns 87% of Thelo and is the deputy chairman of Comair. He told the Sunday Times of the deal: "There was a commercial offer [from HNA] which we negotiated and accepted. That's really it."

The British Airways (UK)-Comair arrangement is a franchise deal, although IAG (the parent owner of BA) had a 12.26% stake in Comair in IAG's fiscal 2014. The HNA-Comair deal does not immediately give HNA a direct partnership with British Airways. BA would certainly be familiar with HNA based on its experience in China. The HNA-Comair deal could make BA more familiar with HNA, but in terms of a partnership between BA and HNA, it seems BA is looking to work more closely with China Eastern.

Immediate links between HNA and Comair are unclear

Mr Venter told the Sunday Times that Comair would look to explore potential synergies with HNA. The immediate benefits are unclear.

Comair comprises the full-service British Airways and low-cost Kulula brands. They mostly operate in southern Africa's regional network. In the company's fiscal 2014 it carried 5.2 million passengers, comprising 1.7 million domestic British Airways passengers, 3.1m domestic Kulula passengers and 290,000 regional Africa British Airways passengers, according to its annual report.

Kulula only flies domestically while the British Airways brand flies mostly around southern Africa; it does not serve points outside of Africa, including any flights to China. HNA's flagship carrier, Hainan Airlines, is the only HNA carrier to serve intercontinental markets. It does not fly to Africa.

Africa was part of Hainan's reported "wishlist" for new routes in 2015. Hainan reportedly proposed a Beijing-Guangzhou-Nairobi service. However, it is not clear how serious this plan was or whether Hainan was looking to upstage China Southern, which had been planning East African routes from its Guangzhou hub. China Southern plans to launch a Guangzhou-Nairobi service.

Hainan Airlines has previously served Africa, with very limited service to Cairo in 2010 and 2011 (14 and 25 flights for each year, respectively). Khartoum was opened in 2009 and served until 2011; service peaked in 2010 with 95 flights during the year. The longest and biggest service was to Luanda, served via Dubai and later via Abu Dhabi. Service opened in 2007 and ran through 2013.

At its peak Hainan offered 141 flights during 2010. There have been no Hainan flights to Africa since 2013. Luanda has accounted for most of Hainan's Africa network.

With China Southern launching Guangzhou-Nairobi and Air China Beijing-Johannesburg, Hainan is effectively blocked from obvious China-Africa routes due to China's one airline, one route policy.

Hainan has faced this challenge before with Beijing-Paris, served by Air China. Hainan attempted to get around this by placing a minority investment in France's regional carrier Aigle Azur. Aigle Azur was to receive A330s from Hainan and open Beijing-Paris services, which ultimately could not secure Russian overflight rights.

Could Hainan seek to replicate that strategy and have Comair fly to China? The prospects of that are highly unlikely; any China-Africa route would be challenged to achieve profitability, unlike Beijing-Paris, which is very lucrative. Hainan also has a much smaller stake in Comair than it does in Aigle Azur.

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TAGS: HNA | Comair | Africa
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