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Analysis: the China syndrome

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Chinese investors are tightening their grip on the global aviation and hospitality world, but at what cost?

When the former NATO airforce base at Hahn in Germany was returned to the private sector in the early years of this century, Ryanair wasted no time in launching a low-cost service from Stansted to the base being turned into a regular airport. But it faced one key problem: as the airport had been in military hands for so long, potential travellers had no real idea where it was.

Ryanair CEO Michael O’Leary had the answer: even though the nearest major city – Frankfurt – was more than 75 miles away, he persuaded the airport to change it’s name to Frankfurt-Hahn. Lufthansa, which was the main operator out of the proper Frankfurt airport located less than ten miles from the city centre, objected to the name but failed to persuade the German courts to reverse Ryanair’s alleged ‘bait-and-switch’ tactics.

Now Ryanair uses Frankfurt-Hahn to serve some 34 destinations in Europe and north Africa and, ironically, started services this year from the ‘real’ Frankfurt airport.

Airport spending spree
But the Frankfurt-Hahn story has another twist. In late August, an 82.5 per cent stake in the airport was sold to Chinese conglomerate HNA Group for just over €15 million. HNA, which started out in the early 1990s as regional carrier Hainan Airlines and is now China’s fourth largest carrier, has been on an airport-themed spending spree recently.

In August this year it also acquired a 30 per cent holding in Rio de Janeiro’s international airport for US$19 million – which could be followed this November by a €400 million deal to operate Belgrade’s Nikola Tesla international airport for the next 25 years, if HNA comes out top in the bidding process.

August was also when HNA acquired a 16 per cent stake –valued at US$1.4 billion – in Swiss airport retailer Dufry, which operates some 2,200 duty-free and other retail outlets around the world. This acquisition complements the Swissport global airport facilities and cargo handling business HNA bought for US$2.8 billion. It completed the deal in early 2016.

Hotels on the menu
But it is not just airports and their associated facilities that are attracting the Chinese group: hotels have also firmly been in its sights. In the last year, HNA has bought Carlson Hotels – ending the Carlson family’s continuous ownership since the hotelier was founded in 1938 – and which also included a 51 per cent controlling stake in Europe’s Rezidor Hotels group, which includes the Radisson brands.

HNA’s hotel portfolio additionally now covers a near 30 per cent stake in Spain’s NH Hotels as well as a 16 per cent shareholding in America’s Red Lion Hotels.

And for good measure, late last year HNA snapped up a 25 per cent stake – worth US$6.5 billion – in Hilton Worldwide, the world’s second biggest hospitality chain (behind Marriott) with some 825,000 rooms and just over 5,000 hotels worldwide (including timeshare properties). The deal made it Hilton’s biggest outside investor.

HNA is not the only Chinese company to have targeted Western travel assets in the past few years. Chinese insurance group Anbang, for example, tried to gatecrash Marriott’s initial US$11.5 billion cash-and-shares offer for Starwood Hotels last year with an all-cash US$14 billion approach, although it later withdrew the bid to leave Marriott victorious after it agreed to pay US$13 billion to seal a deal.

The failed Starwood bid came shortly after Anbang had successfully snapped up another US hotels group Strategic Hotels & Resorts, which had a portfolio of 16 properties, for US$6.5 billion.

Previously, it had bought New York’s iconic Waldorf Astoria for nearly US$2 billion – a world record for a single hotel – in a deal which first started to raise concerns in the US about Chinese intentions in acquiring hospitality assets, especially since the hotel was popular with visiting diplomats, and many US presidents have stayed there when visiting New York on official business.

Following the sale, President Obama broke with tradition when attending the opening of the UN General Assembly in autumn 2015 and, instead, stayed at the Lotte New York Palace luxury hotel on Madison Avenue. According to the New York Times, quoting unnamed administration officials, the decision to change hotels was because of ‘security concerns’. The Waldorf Astoria closed earlier this year for a major two-year renovation.

Anbang, moreover, was also prevented from buying all the Strategic Hotels it wanted: the famous Hotel del Coronado in San Diego (which featured in the film Some Like it Hot) roused national security issues because of its strategic location between two US naval bases. Its sale was blocked by Washington, although the rest of the deal went through.

French ventures
Meanwhile, China’s Jin Jiang International – the fifth largest global hotel group – last year built up a 15 per cent stake in France’s Accorhotels, before shrinking it slightly to just under 13 per cent. This sparked continuing speculation that it plans a full bid for Accor, although this has not materialised.

Jin Jiang previously (in 2015) had acquired France’s Louvre Hotels for €1.3 billion – at the time the continent’s second biggest hotelier with brands including Golden Tulip and Companile. The deal was partly to give Jin Jiang a European base to act as a vehicle for future acquisitions, although not necessarily in Europe. Earlier this year, for example, Louvre paid an estimated US$50 million for a 75 per cent stake in India’s Sarovar Hotels.

And it is not just hospitality groups and investors that are doing the buying: late last year Ctrip, one of China’s biggest OTAs, acquired Scottish-based metasearch engine Skyscanner for £1.4 billion. Skyscanner’s appeal to the Chinese was enhanced by its strong position in the fast-growing mobilebased travel search market.

But the deal-making is not all one-way: Marriott International recently formed a joint venture with Chinese e-commerce group Alibaba – often described as the ‘Amazon of China’ – to make its 30 global hotel brands and more than 6,200 hotels available to Alibaba’s vast customer base. The deal also links both companies’ loyalty schemes after a test marketing programme with Alibaba last year saw some 6,000 new Marriott Rewards members signed up in just six weeks.

Business travel growth
Several factors have driven all this activity. One is the rapid growth of both Chinese leisure and business travellers on the world stage as a result of the country’s economic growth and more open ‘face’ internationally. Some 127 million trips abroad by Chinese tourists are expected this year – up 4 per cent on 2016 – with spending up 5 per cent to US$126 billion, according to figures from the China National Tourism Administration.

Moreover, in terms of business travel, the Chinese are emerging as global players. Latest research from the GBTA Foundation, released at its Boston conference in July, showed that in 2016, for the second year running, China was top for total business travel spend. It put the value of China’s spending on business travel at US$317.9 billion, compared with US$283.6 billion for the US and US$50.4 billion for the UK.

“China accounts for nearly 25 per cent of global business travel spending, up dramatically from a 5 per cent share at the turn of the century,” says Michael McCormick, the GBTA’s executive director and chief operating officer. “While the projected growth rates are relatively low for China, they still represent tremendous growth,” he adds.

While 95 per cent of China’s business travel spend at present is domestically based, much of the Chinese takeover activity overseas in the aviation and hospitality world reflects longer-term hopes of a rebalancing towards more outbound business travel, expected to be worth almost US$14 billion this year, according to the GBTA.

This is backed up by the Chinese government’s ‘Belt and Road’ initiative, a US$900 billion overseas infrastructure investment strategy to boost trade routes by land and sea.

Projects already underway include new ports and pipelines, and even the £20 billion joint China-France nuclear power station being built at Hinkley Point in the UK comes under the initiative’s aegis.

Deals financed by debt
But there are some clouds on the horizon. Chinese financial authorities have become concerned about some of the deals concluded over the past year, especially in the travel and hospitality sectors where the acquisitions have largely been financed by debt, with often a lack of clarity as to the source. Both HNA and Anbang, among others, have caught the regulator’s eye – especially given HNA’s US$50 billion of debt-financed overseas takeovers in the past two years.

All this debt has to be paid for and there is naturally some concern over the impact on hotel room rates, with fears they could rise as a result. The latest GBTA/CWT Global Travel Price Forecast for 2018 warns that increasing ‘intra-continent demand’ for China (and India) is “putting additional pricing pressure on key markets… and buyers should anticipate a more challenging discussion with newly-merged hotel groups.”

It suggests this is especially important in high-volume markets, including Beijing and Shanghai. “To prepare, buyers should research options heavily since the market remains highly fragmented and competitive,” it adds.

Overall the forecast is for price rises of 5.7 per cent next year for hotels in mainland China, against a global average of 3.7 per cent. The best deals, however, may be found in Hong Kong, where prices are forecast to fall 0.2 per cent.

The big winners in the decades ahead look like being Boeing, Airbus and other aircraft manufacturers which sell to China. Boeing recently raised its forecasts of demand from Chinese airlines for new aircraft over the next 20 years by 6.3 per cent to 7,240 planes. “China’s fleet size is expected to grow at a pace well above the world average, and almost 20 per cent of new airplane demand will be from airlines based in China,” says Randy Tinseth, a senior Boeing executive. The value of all these new airliners? Some US$1.1 trillion.

Mistaken identity
When Chinese conglomerate HNA Group recently announced a US$1 billion bid for CWT, it seemed just the latest example of the Hainan Airlines owner’s ongoing acquisition spree for travel-related assets, from hotels to airports to duty-free shops. But, in fact, this time HNA had changed its target: the CWT in its sights was not the global travel management group, Carlson Wagonlit Travel, but rather a Singaporean logistics company.

Yet few would have been surprised if, indeed, it had been the travel management company. CWT’s 1996 partnership with China Air Service clearly showed some foresight in the massive economic growth ahead, especially given the imminent return of Hong Kong (1997) and Macau (1999) to Chinese control.

Eventually, in 2003, the partnership turned into a joint venture, based in Beijing, and was reportedly the first JV between Chinese and foreign travel companies to be given an air agency licence. The JV operates under the name Carlson Wagonlit Travel (CWT) China.

Long-time rival HRG was only a year behind CWT when, in 2004, it opened a joint venture with hotelier Jin Jiang International under the HRG China banner. At that time, HRG was believed to be the first foreign-owned travel company to have a majority stake in such a JV.

BCD Travel also signalled its intent to increase its presence in the Greater China market when, late last year, it acquired majority ownership of its joint venture, established in 2006, with Hong Kongbased partner MF Jebsen.

Meanwhile, a year ago Concur established a ‘strategic partnership’ with China DataCom Corporation – a joint venture between Concur’s owner SAP and a Chinese telecoms company – to open locally based data centres to help companies manage their travel & expense spending. Concur also partners with Chinese OTA Ctrip and ground transportation company Didi Chuxing to provide other travel services for clients.

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