Budapest Post

Cum Deo pro Patria et Libertate
Budapest, Europe and world news

United Airlines’ $300 Million Skeleton In The Closet: Hong Kong Route Impairment

United Airlines’ $300 Million Skeleton In The Closet: Hong Kong Route Impairment

While United Airlines wants to look past its Continental Airlines merger, it appears to be dealing with an even older matter: writing down the value of the Asia-Pacific network it acquired in 1985 from Pan Am, which gave United the dominant position in the region it still enjoys today.
United has taken a $296 million impairment on its Hong Kong routes in two tranches, first a $206 million charge announced in January 2019 – before the civil disruption in Hong Kong that is seeing airlines post losses but not make write-downs. The first tranche was blamed on costs rising faster than revenue. The second tranche, of $90 million, was announced in early January 2020 and represented a full impairment of the Hong Kong route. It was blamed on decreased demand and revenue.

Hong Kong was one of thirteen Asia-Pacific destinations United bought, along with 18 widebody aircraft, from Pan Am for $750 million in 1985, equivalent today to $1.8 billion after inflation. The transaction also included parts, property and facilities. United declined to comment if it still attributes value to any of the twelve other markets it bought.

To simplify the cost by ignoring the transaction’s large aircraft expense, each destination on average was worth $58 million, or $138 million today after inflation, far below United’s $296 million impairment. Yet is unclear why United kept such high value for so long. United’s Asia-Pacific network historically generated healthy profits that should have gradually written down the transaction value. Pan Am’s Asia-Pacific network made $132 million in the two years prior to its sale.

United said the Hong Kong routes were valued as an intangible asset part of collateral for a loan. The asset classification seems questionable given the commercial and legal evolution of international aviation as it pertains to two areas, traffic rights and slots.

First, traffic rights: United bought Pan Am’s Asia-Pacific network at a time of heavy regulation when countries only allowed a specific number of airlines and flights – thus creating value to the route authority. Since then the US has championed open sky agreements, a sweeping change that permit an unlimited number of airlines from either side to offer as many flights as they wish.

The US and Hong Kong removed restrictions on passenger flights in 2002, liberalizing the market and permitting any US or Hong Kong airline to fly as much as it wants. That should have meant United’s Hong Kong assets lost all value; United no longer had any access another US airline could not gain.

Whereas United in 1985 bought further route access to Hong Kong, American Airlines last decade used free market access to launch two Hong Kong flights. United declined to comment about impairment methodology and why the valuation remained for so long. United’s first impairment said it was done as part of its annual review.

Second, slots: United has not indicated the valuation was related to Hong Kong airport slots, but either way this could not be possible. Aviation growth outpacing infrastructure expansion has made more airports slot congested. Perhaps best known is London Heathrow, where airlines can legally sell their slots to each other. The most expensive known sale was Oman Air spending $75 million for a slot pair at peak timings. Those transaction opportunities can allow airlines to value their Heathrow slot portfolio.

But slots at Hong Kong cannot be sold. Official rules only permit trading between an airline and its subsidiaries (for example, Cathay Pacific and Cathay Dragon), or between subsidiaries (Cathay Dragon and HK Express). So without being able to sell its slots at congested Hong Kong, United could not ascribe value to the slots. Other Asian airports also tend to prohibit slot sales, unlike European and American counterparts.
Besides Hong Kong, United’s Pan Am transaction included access to Auckland, Bangkok, Beijing, Manila, Melbourne, Osaka, Seoul, Shanghai, Singapore, Sydney, Thailand and Tokyo. United already served Hong Kong and Tokyo, but the Pan Am deal gave it more exposure. The markets have all since become open skies with the exception of mainland China and Tokyo Haneda.

The US assigns airlines to the limited permissions to land in mainland China and at Tokyo Haneda. Approval is given to an airline for a specific city-pair combination, and the airline needs permission if they want to later change it. Alternatively the authority can be re-allocated to another airline, as happened to a Delta Haneda slot that was re-allocated to American. Being unable to freely transfer an authority would also challenge the ability to provide a valuation on those flights.
AI Disclaimer: An advanced artificial intelligence (AI) system generated the content of this page on its own. This innovative technology conducts extensive research from a variety of reliable sources, performs rigorous fact-checking and verification, cleans up and balances biased or manipulated content, and presents a minimal factual summary that is just enough yet essential for you to function as an informed and educated citizen. Please keep in mind, however, that this system is an evolving technology, and as a result, the article may contain accidental inaccuracies or errors. We urge you to help us improve our site by reporting any inaccuracies you find using the "Contact Us" link at the bottom of this page. Your helpful feedback helps us improve our system and deliver more precise content. When you find an article of interest here, please look for the full and extensive coverage of this topic in traditional news sources, as they are written by professional journalists that we try to support, not replace. We appreciate your understanding and assistance.
Newsletter

Related Articles

0:00
0:00
Close
Severe Heatwave Claims 2,300 Lives Across Europe
Declining Beer Consumption Signals Cultural Shift in Germany
Emails Leaked: How Passenger Luggage Became a Side Income for Airport Workers
Polish MEP: “Dear Leftists - China is laughing at you, Russia is laughing, India is laughing”
Western Europe Records Hottest June on Record
BRICS Expands Membership with Indonesia and Ten New Partner Countries
Elon Musk Founds a Party Following a Poll on X: "You Wanted It – You Got It!"
China’s Central Bank Consults European Peers on Low-Rate Strategies
France Requests Airlines to Cut Flights at Paris Airports Amid Planned Air Traffic Controller Strike
Poland Implements Border Checks Amid Growing Migration Tensions
Emirates Airline Expands Market Share with New $20 Million Campaign
Amazon Reaches Milestone with Deployment of One Millionth Robot
Yulia Putintseva Calls for Spectator Ejection at Wimbledon Over Safety Concerns
House Oversight Committee Subpoenas Former Jill Biden Aide Amid Investigation into Alleged Concealment of President Biden's Cognitive Health
Amazon Reaches Major Automation Milestone with Over One Million Robots
Extreme Heat Wave Sweeps Across Europe, Hitting Record Temperatures
Meta Announces Formation of Ambitious AI Unit, Meta Superintelligence Labs
Robots Compete in Football Tournament in China Amid Injuries
China Unveils Miniature Insect-Like Surveillance Drone
Marc Marquez Claims Victory at Dutch Grand Prix Amidst Family Misfortune
Germany Votes to Suspend Family Reunification for Asylum Seekers
Budapest Pride Parade Draws 200,000 Participants Amid Government Ban
Southern Europe Experiences Extreme Heat
Xiaomi's YU7 SUV Launch Garners Record Pre-Orders Amid Market Challenges
Jeff Bezos and Lauren Sanchez's Lavish Wedding in Venice
Russia Launches Largest Air Assault on Ukraine Since Invasion
Massive Anti-Government Protests Erupt in Belgrade
Iran Executes Alleged Israeli Spies and Arrests Hundreds Amid Post-War Crackdown
Hungary's Prime Minister Criticizes NATO's Role in Ukraine
EU TO HUNGARY: LET THEM PRIDE OR PREP FOR SHADE. ORBÁN TO EU: STAY IN YOUR LANE AND FIX YOUR OWN MESS.
Hungarian Scientist to Conduct 30 Research Experiments on the International Space Station
NATO Members Agree to 5% Defense Spending Target by 2035
NATO Leaders Endorse Plan for Increased Defence Spending
U.S. Crude Oil Prices Drop Below $65 Amid Market Volatility
International Astronaut Team Launched to Space Station
Macron and Merz: Europe must arm itself in an unstable world
Germany and Italy Under Pressure to Repatriate $245bn of Gold from US Vaults
Iran Intensifies Crackdown on Alleged Mossad Operatives After Sabotage Claims
Trump Praises Iran’s ‘Very Weak’ Response After U.S. Strikes and Presses Israel to Pursue Peace
Oil Prices Set to Surge After US Strikes Iran
BA and Singapore Airlines Cancel Dubai Flights Amid Middle East Tensions
Trump Faces Backlash from MAGA Base Over Iran Strikes
Meta Bets $14 B on Alexandr Wang to Drive AI Ambitions
FedEx Founder Fred Smith, ‘Heart and Soul’ of the Company, Dies at 80
Chinese Factories Shift Away from U.S. Amid Trump‑Era Tariffs
Pimco Seizes Opportunity in Japan’s Dislocated Bond Market
Labubu Doll Drives Pop Mart to Status as China’s Most Valuable Toy Maker
Global Coal Demand Defies Paris Accord Goals
United States Conducts Precision Strikes on Iran’s Nuclear Sites
US strikes Iran nuclear sites, Trump says
×