HNA Group shrinks feeder airlines and invests extensively on larger jets

While a number of national aviation companies have been curtailing or delaying orders of new airplanes , the HNA Group, the 4th biggest aviation group in China, has cancelled the introduction of 25 ERJ145 jetliners for feeder airlines which has caused great controversy. In addition, almost simultaniously, the HNA Group announced that it will introduce 38 airplanes in 2009. Such adverse actions may indicate that the HNA Group does not have much expectation for regional aviation. On May 1st, Empresa Brasileira de Aeronáutica S.A. (Embraer) published the news that Harbin Embraer Aircraft Industry Co.,Ltd (Harbin Embraer), which is its joint venture in China, has achieved an agreement with the HNA Group. The new agreement has varied the contract signed by both parties on Aug 31st, 2006, and modified the previous order of 50 ERJ 145 jet aircraft to new order of 25. Hafei Aviation Industy Co. Ltd (Hafei), which is the shareholder of Harbin Embraer and holds 24.5% of stocks ,has also confirmed this information in its public notice issued on May 4th. According to the new agreement, both parties have also reappointed the delivery time for the new aircraft, changed from the end of 2010 to the middle of 2011. Shown by information provided by Hafei, the previous sales contract of 50 ERJ145 aircraft was signed by the HNA Group and Harbin Embraer in August of 2007, had a total value of $1.1 billion USD. In compliance with the contract, Harbin Embraer will deliver these aircraft from Sep of 2007 to the end of 2010. As of Apr 30th, 2009, Harbin Embraer has delivered 12 ERJ145 jet aircraft to HNA. Although it is HNA which made the contract to buy the ERJ145’s, it will be the Grand China Express Co., Ltd which will use these aircraft. Grand China Express Co., Ltd is under the HNA Group and has shares held by HNA. The HNA Group has stated that Grand China Express is the biggest professional regional aviation company in China right now. It is co-funded by the HNA Group, HNA and the Tianjin Port Free Trade Zone, which was officially established on Mar 30th, 2007. Grand China Express currently owns the largest regional aircraft team in China . As of until April of 2009, it owned 51 regional airliners, including 10 E190 and 12 ERJ145 which are all products of Embraer. Hafei indicated in its announcement that the factors, including the current economic crisis and the lack of aviators in the aviation company, are the main reasons for HNA’s order cancellation. Although HNA cancelled the introduction of the small aircraft, it still has quite a good appetite on big aircraft. According to its public notice issued on April 29th, HNA plans to introduce 38 aircraft in 2009, consisting of 2 Airbus A340, 3 Airbus A330, 9 Airbus A319 and 24 Boeing aircraft. Among them, HNA plans to purchase 14 Boeing 737-800 aircraft for itself with a total value of $679 million USD , and purchase 9 Airbus A319 with total value of $369 million USD; for the other 15 aircraft, they will be acquired in the way of an operating lease. During the NPC and the CPPCC, which were held in March this year, the Chairman of the HNA Group expressed his concern regarding the difficult situations facing regional aviation in China: “the value-added tax rate of import duty for feeder aircraft and air materials is as high as 22.85%, much higher than the rate of 5.04% for trunk aircraft; in contrast, the cost of feeder airline, including aviation fuel, airport take-off and landing fees, tax and etc, stays in the same level as the cost of trunk airlines. Such a situation has caused the average kilometer cost for feeder airlines to be 50% higher than the cost for trunk airlines.” Shown from HNA’s income distribution for their main operation, 65% of income comes from areas based in Haikou, which is basically equal to the revenue of last year; but the earnings from the Xi’an region has decreased by 23% compared to 2007. It is noticeable that the development speed for feeder airlines in Xi’an, one of 7 operation basis for Grand China Express in China, has always been in the leading role, while several national companies, which run feeder airline aviation business, have also considered Xi’an as an important market.