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Small carrier set for big expansion as mainland backer's plans for regional reach come to light

The prospect of competing against a well-funded CR Airways with a fleet of 150-seat regional aircraft will undoubtedly turn a few heads at the headquarters of Hong Kong's biggest airlines this morning.

While a Hainan National Airlines (HNA)-backed CR Airways would appear to be particularly bad news for a more vulnerable start-up such as Hong Kong Express, HNA's grander aspirations to become a regional, if not international, player may step harder on the toes of more established players.

The Air Transport Licensing Authority in May approved CR's applications to fly to 27 mainland destinations. But people who know the scope of the HNA Group's ambitions say it has little interest in more mainland rights, whether or not the services can be mounted from Hong Kong.

HNA's real objective with CR Airways is said to be twofold: to use  Hong Kong as a regional launch pad and to boost  its asset portfolio  before listing on the  local exchange next year.

While lulling his rivals to sleep with sporadic services - mostly to a former Marcos hideaway in Laoaog in the Philippines, CR Airways owner Robert Yip Kwong has been quietly amassing licences for the past three years.

HNA's regional portfolio includes  licences to fly to some of Asia's most popular tourist and business destinations - Kota Kinabalu, Langkawi, Siem Reap, Phuket, Phnom Penh, Hanoi, Ho Chi Minh City, Danang and Macau.

State planning authorities have long stymied the ambitions of Hainan Airlines, the group's main carrier. It offers a meagre international network of five scheduled destinations from its base in Haikou and  is  dependent on the authorities, not demand, for expansion.

While mainland airlines are 'allocated' the rights to fly to international destinations, Hong Kong's airlines need only apply.

It is understood  the 60 per cent on offer from CR Airways will come from Mr Yip's share of the  firm, not the shares Hong Kong-listed Yu Ming Investments potentially bought last year when it boosted the  carrier with an injection of $140 million in convertible bonds.

The bonds, which come good in 2009, have yet to be converted into shares but insiders say they would represent 30 per cent of CR Airways if that option were  taken.

HNA Group chairman Chen Feng told  mainland media on Monday that his application to jointly list  Hainan Airlines and five other carriers on the exchange had been approved by Beijing.

It has been reported that the group - which will also pack Xinhua Airlines, Changan Airlines, Shanxi Airlines, Deer Jet and all-cargo carrier Yangtze River Express into the listing vehicle - will aim to raise  $5 billion for fleet expansion.

The addition of CR Airways would add another, more exotic element to the portfolio, one foreign investors may warm to. The listed company could also give the group a Hong Kong-based company to fit the ownership and principle place of business requirements for the transfer of CR Airways' licences.

Mr Chen said the listing vehicle would be formed before the end of the year and expectations are for a second-quarter listing.

A mainland takeover of a Hong Kong airline is not unprecedented, of course; the Hong Kong-listed arm of the state-owned China National Aviation Corp took control of Dragonair from divisions of Swire and Citic in the mid-1990s.

But that acquisition surrendered the single largest share in the carrier  to mainland hands, not majority control.

It's a safe bet that the number-crunchers at Government House will watch this upcoming share swap very closely.

'The ultimate test will be in CR Airways' final corporate structure,' said an official with knowledge of the regulatory hurdles that lie ahead.



Airlines brace for turbulence as CR deal looms