Cathay and DHL plan reorganization of Air Hong Kong

In an announcement on the Hong Kong Stock Exchange, Cathay Pacific Airways and DHL Express said they had entered into a non-binding memorandum of understanding covering a change in ownership of their Hong Kong-based joint-venture all-cargo airline, Air Hong Kong (AHK).

In the MoU, the two companies say “it is contemplated that” three major changes will take effect on 31 December 2018, when their current joint-venture and block-space agreements expire

• The Cathay Pacific Group and the DHL Group will enter into the Share Transaction for the Cathay Pacific Group to purchase the AHK minority interest from the DHL Group, with AHK consequently becoming a wholly owned subsidiary of Cathay Pacific

• AHK and DHL will enter into the sale and leaseback transaction in respect of AHKs freighter assets

• AHK and DHL will enter into a new block space agreement

The full text of the MoU is available here, but the condensed version is that, although everything about Air Hong will change on 1 January 2019, nothing will change. Looking at the first two of the big changes makes it seem otherwise:

• Today, AHK is a joint-venture company, with Cathay Pacific holding 60% and DHL 40%. If the agreement in the MoU is firmed, Cathay will take 100% ownership, and AHK will become a wholly-owned subsidiary of Cathay.

• Today, AHK owns eight A300-600 General Freighters. If the new deal goes ahead, AHK will sell all eight to DHL.

But the third change – the new block space agreement – brings to mind the old saying: “the more things change, the more they stay the same.” Because, under the new agreement, DHL will lease the freighters back to AHK, and AHK will operate them in DHL’s Asian network… Just as it does today.

Of course, as the announcement points out: “No definitive legally binding documentation has been entered into in relation to the transactions contemplated by the MOU. There is no assurance that any such legally binding documentation will be entered into. Shareholders and potential investors are advised to exercise caution in dealing in shares of Cathay Pacific.” So, take it for whatever you think it is worth. Our guess is that the deal will go ahead more or less as planned, but that is just a guess.

Finally, for those interested in aviation history, here’s the Air Hong Kong story, in a nutshell:

1986: Air Hong Kong founded by three businessmen from Hong Kong and the UK.

1988: AHK begins charter service from Hong Kong to India, Nepal, and the UK with a single 707 freighter.

1990: AHK adds a second 707 freighter and begins scheduled service to Manchester.

1993: AHK’s fleet has grown to include two 747-100Fs as well as the 707, and its route network now includes scheduled service to Brussels, Dubai, Ho Chi Minh City, Manchester, Nagoya, and Singapore

1994: The owners sell a 75% stake in AHK to Cathay Pacific Airways for HK$200 million. The fleet has grown to include a third 747-100F.

1994 – 2000: Falling demand forces AHK to reduce its fleet to just two 747-100Fs, but, as demand rises, the carrier upgrades and expands its fleet again, operating three 747-200Fs by 2000.

2002: In February 2002, Cathay acquires the remaining 25% of AHK. By mid-year, service to Europe and the Middle East is cut, as Cathay focuses the AHK operation on intra-Asia service. Then, in October, Cathay entered a joint-venture agreement with DHL Express, under which DHL acquired a 30% stake in Air Hong Kong, and the partners agree to completely re-fleet the airline so that it can operate for DHL in Asia.

2003 – 2017: In 2003, DHL upped its stake to 40%, and in 2004 took delivery of the first of eight new-build A300-600 General Freighters from Airbus. This was a new variant of the standard A300-600F, with a more advanced cargo loading system and a larger lower-deck door. The partners expanded the AHK fleet in 2011 with the dry lease of three 747-400BCFs from Cathay, and again in 2014 with the ACMI lease of two A300-600Fs from Air Contractors (since rebranded ASL Airlines Ireland).

July 2017: Cathay and DHL sign the MoU that will see Cathay take 100% ownership of AHK at the end of 2018, while DHL takes ownership of the eight A300-600 freighters and leases them back to AHK.