HNA has made a sensible bet on the skies. The acquisitive Chinese group will pay $10 billion or just over one times book value for CIT’s aircraft leasing unit, a decent rate compared to past deals. Competition in leasing is fierce, and returns can be low, but HNA’s increasingly global reach means it is well-placed to grow.
For U.S. lender CIT, the deal is a respectable exit from a business that was distracting its balance sheet. In fact, the company is trying to exit China altogether. By way of comparison, when Bohai Leasing bought Avolon last September, it paid around 1.5 times book; Bank of China’s leasing unit, BOC Aviation, listed in May at 1.3 times book.
For buyer Avolon, which HNA controls through Bohai, the purchase is a way to grow quickly. The company has doubled in size with this deal – which lands it an additional 69 airline customers and orders for 349 new planes combined with its current commitments. A Chinese owner will help Avolon compete in the mainland market, where growth could be exponential but competition is intense.
China still needs more and better planes before it approaches the scale of the U.S. civil aviation market, yet difficulties with procurement have left the country’s airlines with an aging fleet. By integrating the seasoned management at CIT with the deep pockets of the HNA Group – which itself owns and operates over a dozen airlines – the new business should be able to drive hard bargains and survive any price war.
HNA also gets an overseas hedge with CIT’s fleet in the U.S. and Europe. There are a lot of clouds in the China market. Military control of airspace has hobbled the ability of airlines to expand into new routes. The likelihood of a softer yuan against the dollar would punish domestic airlines. And there is intense price competition from fly-by-night local leasing companies that are happy to earn low single-digits returns.
Either way, in this business bigger is better, and HNA just got a lot bigger.