Hong Kong Airlines Limited has turned to Air China and other parties for a strategic lifeline to reverse its financial woes, amid an impasse with a consortium of white knights after nearly nine months of fruitless negotiations, said three sources familiar with the matter.

Air China, the nation’s flag carrier and biggest international airline, is among the parties in talks to begin due diligence on Hong Kong Airlines, the sources said. An earlier takeover bid by Citic Group, Wuxi Communications Industry Group and the family of Hong Kong’s former chief secretary Henry Tang Ying-yen failed to make headway because of a disagreement over pricing, the sources said.

“Hong Kong Airlines is here to stay and committed to sustaining our long-term growth,” the airline said in response to a query by South China Morning Post, adding that as a private company, it does not disclose its financial activities, or comment on rumours and speculation. “We are always open to strong strategic investors.”

The emergence of several new white knights is the latest twist in Hong Kong Airlines’ journey back to financial health, as the stricken carrier had to lay off 10 per cent of its staff and put its ground crew on a three-day work week to cut cost. The airline, which flies passengers and cargo to 48 destinations, has been operating on the brink of collapse for months, as Hong Kong’s anti-government protests since June 2019 had deterred mainland Chinese travellers to the city.

Hong Kong Airlines, established in 2006, is 34-per cent owned by Frontier Investment Partner LP. HNA Group owns 29 per cent of the carrier, and former director Zhong Guosong has 27 per cent, while minority shareholders hold the remaining 10 per cent.

The airline began talks with the Citic-Wuxi Communications consortium last July, part of a debt workout plan led by the policy lender China Development Bank to untangle the debt at HNA Group.

Citic is China’s biggest state-owned conglomerate, while Wuxi Communications is the investment arm of Wuxi’s city government in Jiangsu province, which also owns the Dornier Seawings amphibious aircraft maker.

The consortium initially planned to inject at least 2 billion yuan (US$288.52 million) of capital into Hong Kong Airlines, and assume part of its debt, according to sources familiar with the plan. Wuxi Communications came very close to a deal, to the extent of drawing up a draft agreement, two sources said. However, the takeover failed as Wuxi Communications ultimately balked at HNA Group’s asking price for the controlling stake in Hong Kong Airlines, they said.

Tang, the former Chief Secretary of Hong Kong, confirmed on March 6 to the Post that his family had “walked away” from the takeover, declining to elaborate. An official at Wuxi Communications, when reached at the company’s office, declined to comment.

More parties were brought to the negotiation table last week, after China Development Bank showed up in a committee led by the Hainan provincial government and China’s aviation regulator to help HNA Group manage its financial risk. The indebted group’s aviation assets could be broken up and taken over by China’s state carriers including Air China, Bloomberg reported on February 20, citing people familiar with the matter.

HNA Group, which began as a regional airline based in the Hainan provincial capital of Haikou, went on a global shopping spree between 2015 and 2017 – mostly fuelled by loans – for assets.

At its peak, HNA Group owned stakes in Deutsche Bank, Hilton hotels, a portfolio of office towers and real estate all over the world as well as waterfront land parcels in Hong Kong. After Chinese regulators cracked down on its debt-fuelled acquisitions, HNA turned into a net seller of assets, cutting its debt by 40 per cent to 525.6 billion yuan (HK$585.7 billion) as of June 2019.

The original disposal of Hong Kong Airlines is now awaiting the decision by HNA Group’s risk management committee on the overall strategy for the entire group, the sources said.

China Development Bank, which is sponsoring and controlling the debt workout process, still favours the original bailout by Wuxi Communications, giving the industrial group a chance to prevail, they said. China Development Bank declined to comment in Beijing.

A new white knight for Hong Kong Airlines would require approval by the city’s government, under a legal requirement for any change of shareholding exceeding 10 per cent in an airline to get the local authority’s nod.

It’s an opportunity for Air China to extend its stake outside the mainland. The carrier already owns 29.9 per cent of Cathay Pacific Airways, as the second-largest shareholder of Hong Kong’s hometown carrier behind Swire Pacific Group’s 45 per cent. Air China declined to comment.

The state carrier may be able to pick up Hong Kong Airlines at an even lower valuation, as the US$1.7 trillion global travel industry has been pushed to the brink by the coronavirus outbreak, which has sickened more than 100,000 people in 80 regions and countries around the world, with a death toll of more than 3,000 people. Even though half of the afflicted have recovered, the rapid spread of the disease has deterred air travel, forcing global airlines including Hong Kong Airlines and HNA’s main income earner Hainan Airlines to slash their capacity.

“It will be a positive move for Air China or other state-owned airlines to take over Hong Kong Airlines as the country can support the development of the new routes related to the mainland cities,” said Clement Chan, managing director of BDO, which is the fifth-largest accounting firm in Hong Kong.

“The current timing will be a buyer's market as the airlines cannot stand firm to demand a high price as the Covid-19 has led the transport and tourism industry gone into wintertime. But for the longer term, the airlines business will be bounced back when the outbreak will be under control.”