China's HNA Group has big plans in business aviation. It also has a healthy dose of prudence. The Chinese travel conglomerate, which is an outgrowth of Hainan Airlines, is aiming at building a global business-aircraft management operation. But in deciding three years ago to do that, HNA realized that there was too much that it did not know about the industry.
The result has been an unusual instance of a Chinese company setting up an offshoot staffed entirely by costly foreigners. HNA aims to use this offshoot, Hongkong Jet, as the core of its global business aviation activities. The group's long-established bizjet operator, Deerjet, could have been tasked with international expansion but is sticking to its mission of growing in mainland China. And at some point, Hongkong Jet is supposed to transfer its expertise back to China.
HNA's challenge stems mainly from the finicky details of exquisite service. China's business aircraft management companies are proliferating, thanks to easier regulation and a growing awareness among the country's upper class and big companies that private jets are attainable and useful. But the many fine points that make up a luxury offering can escape the operators. It may be a good thing that the Chinese companies are competing mainly with each other, so they do not suffer too much pressure while learning to get the service just right.
One Western traveler recalls the service on a chartered Chinese business jet last year. When he asked for orange juice, the cabin attendant fetched a cardboard carton for him. His companion asked for coffee and was given tea. No one asked what they wanted to eat; they got what was available, and it was, at best, airline food.
Is this a big deal? In business aviation, you bet it is. When people pay thousands of dollars an hour to use a private aircraft, they expect the best service.
Hongkong Jet is based in the semi-autonomous city it is named after, but is drawing up plans to move into North America, Europe and maybe elsewhere in Asia, says Chief Executive Chris Buchholz. It will probably do so by buying existing management companies, he adds, reckoning that the group will have three or four air operator's certificates by 2016, even if 100% stakes will not be allowed in some countries, notably the U.S.
The expansion plans of Hongkong Jet are just part of the HNA Group's broad strategy of international acquisitions. The sprawling conglomerate has subsidiaries in hotels, entertainment and much more, plus just about every aspect of civil aviation that it can reach. The group states that it is undertaking a multi-year program of buying businesses abroad, noting that amid widespread economic troubles, some targets are cheap. That is as true in business aviation as anywhere. With HNA behind it, Hongkong Jet should be able to pay for any aircraft management company it sets its sights on.
Although the provincial government of Hainan is a shareholder in HNA, the group is largely private.
Hongkong Jet could set up a fifth operation, in mainland China, Buchholz says. If it does, the company will surely have to play corporate politics with care, since the mainland is Deerjet's territory. Hongkong Jet says that if it moves into mainland China it will offer a service different from Deerjet's.
HNA does eventually want the new company to help Deerjet reach international service standards, but Buchholz says that for the moment Hongkong Jet is too busy with expansion. He confirms that achieving exceptional service quality was a key reason for setting up his new company.
And it is quite a new company, having received its air operator's certificate in November 2011. By August it had 11 aircraft under management, meaning it maintains them and provides pilots and cabin attendants. Those 11 range from a Hawker 4000 to an. One more aircraft, owned by the company, is used for charters. The managed fleet is growing at about 10 aircraft a year.
One might have thought such growth would unnerve Hong Kong's Civil Aviation Department, but Hongkong Jet was designed to expand rapidly—another sign of its role as the kernel of a larger business. “It is a new company but it is not a new team,” says Buchholz. Many of the top managers had worked for a similar Hong Kong company, Metrojet, earlier in their careers. The CEO, chief operating officer and maintenance boss are among them. In its early stages the company is deliberately overstaffed, with 73 people, including 23 maintainers. It helps, too, that some of the aircraft Hongkong Jet now manages, transferred from other operators, have come with the crews and maintainers who were already operating them.
As a subsidiary of a Chinese mainland company, Hongkong Jet is remarkable in having no mainland Chinese employees. Buchholz is Norwegian; the rest of the staff come mainly from various Western countries, Southeast Asia and Hong Kong.
Establishing subsidiaries that are managed by well-paid foreigners is hardly something that Chinese companies instinctively do, even if it is now not unusual for them to buy mature foreign businesses and leave all or most of the managers and workers in place. But the simple truth, which HNA seems to have recognized, is that attention to detail is not a common habit of managers and workers in China; it is, after all, still a developing country.
Some Chinese businesses produce excellent goods or services, but the management effort in getting to that level is usually greater than in most developed countries. Also, a company must know what counts as a good service if it is to provide one; that is not so easy when one is moving into a new business activity and when the social background of managers and workers gives them little ability to judge.
In business aviation, this is showing up not just in the imperfect cabin service typical of Chinese bizjet operators. The aircraft can also be less than spotlessly clean. After a few years of service, their costly wooden cabin fittings might look ill-treated and overdue for new upholstery. The pilot may not bother with the courtesy of telling passengers about the flight plan.
Part of the problem is that the mainland companies are expanding quickly and lack experience, says Jason Liao, chief executive of consultancy China Business Aviation Group. Liao also doubts that Deerjet would have had the management time for foreign expansion.
Hong Kong aviation consultant Jeffrey Lowe, with extensive experience in the local industry, agrees that a mainland management company would have great trouble in offering acceptable service internationally. He remembers once having to explain to a cabin attendant of a mainland operator that the client's meal should be presented attractively, not slopped onto the plate as it might be in a staff cafeteria. The cabin attendant was not lazy; she just did not know. No one had told her before.
Lowe sees another great advantage in HNA setting up the Hong Kong subsidiary: It can help resolve a remarkable clash between Chinese buyers' expectations and the regulator's rules. Chinese buyers of almost any general aviation aircraft, including business jets, tend to approach the transaction as they would when ordering a new car—they want it next week. And while the buyers are unusually anxious to hop in and fly, the Civil Aviation Administration of China is unusually slow in registering their aircraft. The process can take six to eight months, says Lowe.
This creates an opportunity in first registering an aircraft outside of mainland China and flying it from a Hong Kong site until its Chinese registration is ready. Lowe's former employer, Business Aviation Asia, does that, and Hongkong Jet offers that service, too. Buchholz says its customer base is split fairly evenly among Hong Kong, mainland China and Southeast Asia, where some of the aircraft are located.
Despite the awkwardness of flying in China with private aircraft that are not registered there, some mainland customers prefer to keep their aircraft in Hong Kong indefinitely. Operators of non-mainland aircraft normally need to file flight plans two working days before taking off in China—largely eliminating the flexibility that is one of the greatest advantages of a bizjet. And after seven internal flights, the aircraft must leave China. That may not be such a problem for clients who often need to fly abroad, however.