Cathay delays HK$1.2b payment for HK Express deal, report says

Business | 16 May 2019 7:11 pm

Cathay Pacific has delayed its first payment to HNA for the purchase of budget carrier HK Express, Forbes magazine reported citing sources familiar with the matter.

Cathay was due to pay HK$1.2 billion to the debt-strapped Chinese conglomerate on May 8, but claimed it was not obligated since HK Express has failed to dispose of Boeing 747 freighter aircraft it acquired under murky circumstances, the sources say, Forbes reported.

A Cathay Pacific spokesperson would not address the payment, saying, “It is our understanding that all concerned parties are working towards the completion of the deal.” The spokesperson declined to comment on the history of the aircraft, and added that Cathay still expects to acquire HK Express by December 31.

HK Express’ transaction to acquire three 747s was unusual, court proceedings in a civil lawsuit suggest. A New York-based businessman who brokered the deal informed HNA executives he had arranged to pay a US$1m bribe to acquire the second-hand aircraft, according to email messages produced as evidence in the suit, which was filed in 2009 in the U.S. District Court for the Southern District of New York and withdrawn in 2015.

The bribe was included in a signed letter of intent for the US$67 million transaction, but an HNA board member later rejected the bribe, according to a deposition in the case, Forbes reported.

HNA wanted to increase the commission payment to the U.S. broker, who would then make an unrelated payment for HNA, the broker said in a deposition. The court also heard the aircraft were planned to be operated by a Turkish company that would receive payments in an offshore bank account to avoid taxation – a plan that later became unnecessary.

The central issue concerns what was a discovery to many people: HK Express owns at least two 747-400SF freighter aircraft. The aircraft are leased to Turkish cargo airline ACT, which is 49 percent owned by HNA and a related company, according to a US regulatory filing. The aircraft were purchased in 2007 along with a third 747, but the current ownership of the third aircraft is unclear. It is operated by HNA’s Suparna Airlines in mainland China.

The three aircraft were on financial lease with CDB Leasing, which said the lease ended in the second half of 2018.

Cathay wants HK Express to dispose of the 747s so Cathay can reduce its exposure to HNA assets and business dealings due to concerns about possible improper conduct at HNA, according to a source, Forbes said.

HNA has asked leasing company Avolon to purchase the 747s from HK Express, according to sources. Avolon is 30% owned by Japan’s ORIX and 70% owned by Bohai Capital, which is majority controlled by HNA.

However, Avolon is refusing to purchase the 747s until HNA pays Avolon for outstanding dues, sources say. There have been growing disputes in the last two years between Avolon and HNA over aircraft sales and payment, they say. Avolon declined to comment. An HK Express spokesperson said the airline did not own any Boeing aircraft, and then did not respond to a follow-up query.

Complicating Avolon’s outlook is repeated market speculation that HNA wants to sell Avolon, which Avolon has denied. Leasing companies are attractive investments and can attain high sale prices.

Avolon’s portfolio does not appear relevant for the 747s, which are 26-28 years old and nearing the end of their service life. Avolon said in a first-quarter 2019 briefing document, “Our investment strategy is focused on acquiring young, modern, fuel-efficient aircraft that we believe will remain in strong demand.” The lessor added: “Avolon has one of the youngest fleets in the world.” Its portfolio as of March 31 consisted of 951 aircraft but no 747s. Forbes reported.

 

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