Showing posts with label HNCA. Show all posts
Showing posts with label HNCA. Show all posts

Tuesday, February 11, 2014

Cargolux: How to play a bad hand?


















My Orchids. Phalaneopsis "Shut Up". Photo ET

Cargolux: How to play a bad hand?

As promised to some, translated from feierwon.blogspot.com,


In the debate over the sale of a 35 % stake in Cargolux, owned by the Luxembourg government, to a Chinese entity in Henan Province, there seem to appear a number of incongruities. Maybe those can be explained? This was not done until now. However, it is arrogant to deny the debate and to hide issues from the Luxembourg taxpayer, the employees of Cargolux and even the governing bodies of the company, if not such experts as outside counsel. And to selectively ignore advice that is not in favor, while retaining only those favoring the deal.

The public’s right to know is well established: Cargolux is a matter of concern to all taxpayers, so to everyone. Cargolux indeed is not like any other companies. It is almost 100% owned by the state, when considering the parastatals. It matters to us. What Cactus or any other private company however decides, is none of our business.

The facts, the leaks and the rumors

Explaining the partnership between Cargolux and HNCA is not easy. In any case explanations were not communicated spontaneously, exhaustively, nor frankly. Or the partnership agreement has serious shortcomings, and there is no other explanation than to admit that either we were not up to the task, or at least that the agreement lacks consistency and balance. Without direct and open responses, there will be more leaks, which then obviously are not rumors. They are facts, hidden from the public for a purpose, obtained by stealth, and most cannot be trivialized. But unanswered questions about the dark corners of the partnership with HNCA, that leaks do not expose, that vacuum will be filled by rumors.

Mr. Helminger tried to address this lack of communication within the company in a letter to employees. It lists the reasons to be optimistic about the HNCA parnership, including the business plan over five years. But it ends with the warning that "rumors" must stop to avoid ruining the chances of finding new management professionals, and therefore ruining the chances of success for Cargolux . This is a pre-emptive strike of the same kind as the one used by Mr. Schaus towards the Executive Committee, which he called “dysfunctional ", thus potentially endangering the great Chinese project. This is summed up in the simple slogan: if the deal is successful, it will be thanks to us, if it fails, it will be because of you. Unfortunately, such statements cannot reassure the world, as unintentionally it is a subconscious statement exposing one’s own uncertainty about the success of the project one defends.

But the preemptive strikes had their effects, as trade unions have deliberately fallen silent since. Just as did the two members of the Executive Committee, who chivalrously refused to elaborate on the reasons for their resignations. It is true that those speak for themselves. And so do leaks. Some media outlets have contributions that are aligned with the thought that the debate must end.  They mention an “offensive" by Mr. Helminger to defend the project. Which more adequately would be called a “defensive” that became necessary to try to calm the game. Still, it is a good starting point to improve internal and public communication.

Rumors and propaganda are equally harmful

Other initiatives to calm the game are less fortunate. I do not know who inspired an article in “Wort” ( 1) , which for some unknown reason attacks the "myth" of  a Cargolux "stand alone". So this vision of a standalone Cargolux, according to the government, would be a fancyful and impossible vision. And that’s why this idea of a ​​partnership with HNCA is such a great idea! It is interesting to see a newspaper, known to be an outlet for an opposition party, come along and lend its support to the Chinese " good solution ", using a product pitch that seems to have grown in the garden of a biased Ministry. The mystery deepens as to the motivation of Wort, although some continuity with the past is undeniable. The argument against the standalone though is simplistic and defeats itself through its restricted vision, and is awash in sophistry. This isn’t very clever, because people will be wondering what lies behind these bold and wrong assertions, which provides new grounds for rumors. Here are those assertions:

The standalone is not possible, because the 2012 results are bad. 615,286 tons of freight is less than the peak year of 2008, a record 788,286 tons. Unfortunately, this argument is a demonstration against the partnership and in favor of the standalone. The bad year of 2012 was one of a partnership with Qatar Airways, a demonstration that the worst year was when CV was not a standalone. We hasten to ignore also the year 2013. CV is standalone again, after the departure of Qatar Airways. After the miserable year of 2012, 2013 will be a profitable year, as I am told. This provides evidence that the argument that the standalone is not sustainable is misleading. The opposite is rather true.

The second argument is that the company lost 253 million euros since 2007, and that a capital increase of 175 USD is necessary. Forgive me to remind you of a painful detail: the total fines paid by Cargolux these past years totals over USD 250 million. Don’t you see a relationship between the fines and those losses, and capital requirements? CV has operated very well this year. Without those old fines, the numbers would add up nicely. We would be talking about future financing needs only, if any, of 300-400 million. There are investors ready to move in for this, including in Luxembourg, right now.

Based on these two false arguments, one would make us believe the wrong conclusion that there is no alternative to the Joint Venture with the Chinese group. That’s an extreme lack of logic. The conclusion would be correct, but the result of a fallacy? Well, let’s elaborate a bit on that fallacy: it is suggested that  if the Joint Venture were not pursued, the Luxembourg state would have to pay in case of the standalone’s failure. But let’s calm down. In reality the state would also have to pay in the event the JV crashes. Which of the two options is riskier, the partnership or the standalone? In the case of Qatar Airways, it was the partnership with Qatar Airways, not the stand alone. See how the year 2012 worked out, with its poor results!

The final argument is that the various consultants Clifford Chance, UBS and even Arendt & Medernach (!?) could not provide better visions for Cv’s future. Add even Robert Schaus. I would oppose to those two leading experts , Robert Van de Weg and Peter Van De Pas, and Shearman and Sterling, and even Akbar Al Bakr , CEO of Qatar Airways, whom I quote as saying in 2011 : " ... Cargolux, a sound , healthy and profitable company and a leading all- cargo carrier ..... " . He spoke of the standalone.

The most tremendous contradiction in this demonstration is that it explodes under its own arguments: standalone, no, JV with Chinese group, yes! But in fact, in this case stand alone and JV are virtually the same. Cargolux will operate for at least three years as a virtual standalone, which only benefited from a Chinese cash investment. The only differences from another capital investment are multiple obligations that CV has to honor, as a result of an after all very small Chinese investment. Those obligations are bound to trigger losses and lost opportunities to which we have acquiesced in advance. In a nutshell, that amounts to a very costly new shareholder. Even considering the remedy to these planned (!) losses through a USD 15 million relief fund. What a pessimistic prospect! The most worrying aspect is that politicians, who never have even run a lemonade stand, and who consider advice selectively, are making these decisions on behalf of the taxpayer, and affect the future of a multi-billion company and its nearly 1,500 employees.

Omission that would make the difference

Why is there so much mystery around simple and legitimate questions of price, veto and other conditions generally very in favor of the Chinese side? Maybe we as taxpayers should demand that a debate in those circumstances should be held before the Chamber of Deputies. I refer to Article 99 of the Constitution that says ... any significant financial commitment of the State must be authorized by a special law." Although this article refers to real estate transactions, the only transactions conceivable when this was written a century and a half ago , when nobody thought to acquire or sell other securities, such as shares of an airline, it nevertheless indicates that it would have been wise to seek the debate in Parliament and to back the transaction by a special law. The Budgetary Act of 8 June 1999, in Article 80 confirms the merits of such a cautious approach: " Must be permitted by law: sub. d) - any other financial commitment, including state guarantees, the amount of which exceeds the sum of Euros 7,500,000 (seven million five hundred thousand)" This was done for the granting of a guarantee of 3,000. 000,000 of FLux (€75,000,000 million) for the SES before the launch of Luxembourg’s first satellite Astra (1A) in 1988. In case there would be a secret part to a contract with a Chinese official entity (they are all official entities in a planned economy), the Constitution would say . . "Secret treaties are abolished" Tell us all there is. Such a special law would have shed the light on the project, allowed for necessary amendments, and by a clean vote would have ended all discussions. Memo: This is a note to the dossier "Revision of the Constitution."

I would conclude for the rest, that there will be no new divorce of the kind with Qatar Airways. Technically, the Chinese government as the ultimate authority could still refuse approval for the signed project. But HNCA’s contract is too good to give it up. The Luxembourg Government on the other hand has lost its freedom of action by signing up with a Province under Beijing rule. CV is left to assume, and to prepare the first money losing flights to Zhengzhou. An idea for the ​​internal PR effort: on every flight, take a dozen Cargolux employees along to visit Zhengzhou. This would round the corners, and make them happy like Ulysses, who made a nice voyage.... And those who still complain, will not be part of the journey, if I understand the new line correctly.



Monday, February 10, 2014

Monday, January 6, 2014

Cargo Forwarder: CSL Gives a Thumbs Down on Cargolux-HNCA Deal

















My Orchids. Phalaneopsis "You name it". Photo ET

Cargo Forwarder: CSL Gives a Thumbs Down on Cargolux-HNCA Deal

But of course. This is an excellent summary of CSL's comments about the deal. The Chamber is required to advise on ongoing legal issues. 


Cargoforwarder points out the obvious inefficiencies in the agreement, that is unbelievably lopsided. Unless there is more than the documents show and the eye can meet, this will be the second disastrous negotiation that the Luxembourg government leads all on its own, disregarding the rules of good governance of a corporation.

This blog reflected on the same in late December:  http://egidethein.blogspot.com/2013/12/cargolux-shearman-and-chambre-des.html




Sunday, December 29, 2013

Cargolux, Shearman&Sterling, and Chambre des Salariés CSL














My Orchids. Phalaneopsis Target. Photo ET

Cargolux, Shearman & Sterling, and Chambre des Salariés CSL

I'm aware of the two opinions about the pending CV/HNCA deal. The first, dated 7 November by Shearman &Sterling, the second dated 20 December by Chambre des Salariés. Both have similar reservations, concluding that the "agreement" is very lopsided. Both unfortunately confirm my own analysis of what is visible. Both are wondering if they have seen ALL the information.

Looking at the big picture, the agreement will achieve the following: HNCA will gain a share of CV, gain 200,000 tons of traffic, gain a new airline, and other logistical know how. CV can only hope to have no losses of capital and employment, and gives away know how and effort. That is lopsided and very cheap access for HNCA, unless there is a "yes" to the following unanswered question: is there a secret part to the "agreement" serving other purposes than CV? In which case, where are we with the trumpeted commitment to an ever more transparent government? Yes, as taxpayers, we have a right to know. Not only mysterious suggestions about the hidden benefits. List them, until we strike a balance in the "agreement".

1. Let 1,000 questions be asked

 It is very disappointing to see the "agreement" in such a sorry state. Even at the elementary level of language. Even after the botched alliance with Qatar Airways, nothing seems to have been learned. There are dozens if not hundreds of questions to be answered, and some of the visions sound like a pie in the sky.  The target for CV three years from now to move 200,000 tons annually in and out of CGO lets me wonder about who did the underlying projections, including the weekly need for aircraft in those rotations? Not to forget the loss of opportunity for those aircraft, that obviously would be pulled back from now commercially more viable routes.

2. State corporatism at its finest

I'm perplexed to discover that "negotiations" were done by the government alone, without CV's management or other shareholders being present. How can the government, that's not a majority shareholder, commit the other shareholders into other binding agreements, when its proclaimed purpose was to sell its shares? For sure, most of the shareholders won't protest too much, as they are represented by people who owe their positions by the grace of the same government, but not all: Luxair has private investors. And employees have to contemplate this perceived unlawfulness in awe.

3. What about levels of engagement?

In doing its solo "negotiation" beyond the immediate wish to sell its shares, shouldn't the government have negotiated with the Chinese Central government too? There is a logic to the level of representation around the table, there could have been shortcuts, as HNCA's economic development plan is in the context of China's 12th five year plan. CV's interest would have been to have broad rights in China with a priority to serve other existing and commercially viable hubs. Positive cash flow will be of the essence for the indebted CV, not the mere compensation of losses through a limited, ill-defined Fund.

4. Never use an argument that you knew not to be true

Not to miss: the CSL report's Annex about what constitutes illicit governmental aid. It addresses the Luxembourg government's claim that it has to sell its CV stake, given European law. Which obligation, it appears to me, is not present in CV's case, though the government has long argued to the contrary. Not many will believe this. In addition, I would make the case that European obligations under European treaties are not always respected, and many violations by our neighbors have been met with willful blindness in the past. After the Qatar Airways mishap, there was room for leniency towards Luxembourg at the least.  

5. Conclusion

Now the deal is done. Let's negotiate the deal. Fire, aim, ready!
There is a very small statistical chance that we have hit the target. Now we have to try harder and move the target, so we can see it.



Sunday, December 15, 2013

Cargolux: The Deal with HNCA
















My Orchids. Cattleya, a closer look. Photo ET

Cargolux: The Deal with HNCA

Earlier in 2013, no one in Luxembourg would have known the name HNCA. The Acronym stands for Henan Civil Aviation Development & Investment Co., Ltd, created in June of 2012. HNCA has three shareholders: Henan Coal Chemical Industry Group, Henan Transport Investment Group and Zhengzhou City Real Estate Group. Citing from a speech translated into neo-Chinese English: "Zhang Mingchao, Chairman of HNCA, spoke that the HNCA had the glorious mission of developing the civil aviation of Henan province. The Company will keep learning, innovating, optimizing operation, and make more contribution to the construction of Zhengzhou Airport Economic Comprehensive Experimental Zone and Henan Province."

I had a look at the "Commercial Cooperation Agreement" between HNCA and Cargolux in the form of the "Updated draft of 30 September 2013, changes as per meeting HNCA Cargolux 10 December 2013". It has 13 pages, cover page included, and 5 pages of attachments !

The fact that such a short, poor document saw little improvement over the last 10 weeks, is reason enough that I would be embarrassed to bring such a document to a meeting.

Apart from the very little remediation to the text, my analysis fills me with doubt about the negotiation skills of those who did this, the poverty of the language which allows for many questions and opens the door for conflicts in the future, and to open legal questions, which I would ask my lawyer. I have to believe and hope that CV's lawyers saw those considerable questions, which they didn't want to detail publicly?

1. Negotiation 101

HNCA exists since mid 2012. Its mission is to focus on the " Zhengzhou Airport Economic Comprehensive Experimental Zone and Henan Province." Did you read "Experimental"? It says further that "The Company will keep learning, innovating...". 

No one at this stage can say that the parties don't negotiate in good faith. There is an exciting project: creating an airport, now encroached by several towns, expand it from 1 to 4 runways, create a JV with CV for another all cargo airline in Zhengzhou, together with all the infrastructure on the ground, including maintenance and pilot training. Nothing of these exists today. As a young adventurer, not risking my own money, I would go for it in a minute. And as a broker, I would sell it as a nice story for a nice fee to anyone who would listen.

But does this accomplish the "glorious mission" to guarantee CV's future? No one knows from this Agreement exactly what was agreed to. But essentially, not much has changed when it comes to CV's extremely low valuation. It was essentially pre-determined by the undervalued and unfortunate Qatar Airways deal. Now, for the neutral outside observer, there is maybe a very stupid seller, and a sophisticated buyer. But it doesn't impede the next steps, if both sides are happy with the price. The very impatient seller, the Luxembourg government, seems very happy. The only problem there is, it isn't the seller's money, it is the tax payer's money.

As for the rest, CV will be a strategic asset for HNCA in the grandiose adventure of creating a market, an airport with 4 runways, with infrastructure, a new airline with its own maintenance and pilot school, and other unnamed JVs. If that is the exciting project where we want to see CV's future, and where HNCA sees CV as a strategic asset, the overwhelming question is, why didn't CV become a shareholder of HNCA? There was enough valuation in CV (the real value of CV) to get a reciprocal share for CV in HNCA, for no money down. But the opportunity to get reciprocity and a fair valuation for CV was missed. Who negotiated this? A pertinent question, as there was and is no real urgency.

2. The "Commercial Cooperation Agreement" is barely an Executive Summary.

If you buy or sell a one family home in an Anglo-Saxon jurisdiction, the contract can easily have 180 pages. Selling 35% of CV, I understand, can be done in 18 pages, cover page included. It is indeed much easier to read. As I'm not a lawyer, I appreciate that fact, but I would ask my lawyer, if I hadn't fired him yet for such a disappointing performance, the following questions:
Page 2: Define in more detail voting rights and mandatorily convertible bonds
Page 4: Is import + export cargo 30,000 tons or 60,000 tons?
Page 5: If cargo volume through CGO doesn't reach 200,000 tons after 36 months, what happens?
Page 5: With so many JVs considered, why isn't there cross ownership CV-HNCA?
Page 5: There is much uncertainty as the Luxembourg government deals with a non-sovereign Provincial government. What if rules change, CAAC doesn't cooperate or the Chinese government comes out as bad cop undoing what the good cop Henan Province seemed allowed to do?
Page 6: Are 4 flights binding? Who covers the losses? CV is a commercial venture, not a government agency. Page six actually overflows with dictates of a planned economy for a venture that has to care for the bottom-line in a market economy: increase flights, additional "traffic rights", scaling up flights, subsidies and their guarantee over time, etc. But: CV has no veto right, as again, reciprocity would have demanded.
Page 7: 3.7. The Dual Hub Strategy Fund needs "Unanimous decisions". Good luck.
Page 7: 3.8. "Reasonable cooperation" means "best efforts" only?
Page 7. 4.1. "Reputable international consulting firm". What can that be? At what cost?
Page 8. 5. CV could have had cross ownership in HNCA, at no other cost than the value of 35% of CV. Or at least get a better price.
Page 9: 9 is boiler plate language. Just mentioning that there was no excruciating effort in that paragraph.
Page 10: This agreement is under the laws of England and Wales. Future JV's under Chinese laws. Dispute resolution will be through arbitration in Hong Kong (HKIAC), a place not known for its strong pro-Luxembourg bias. It is not impartial territory.
Page 11: 11. Waiver of Sovereign Immunity. But of course: the good cop - bad cop plays out. Luxembourg and the Province of Henan waive their rights. Beijing does not. It is not involved for now. Later it will.
Page 12: 12. Just standard clerical discipline: Fill in the following missing address for HNCA:
HNCA: No.8 Shangwuwaihuan Road, 
Zhengzhou City, Henan Province, China
Zip Code
:450000
Phone: 0371-87519086
Fax:0371-87519086
Page 12: 13.1. We are talking millions in fees, legal etc. Does any third party get commissions? How much? Are those commensurate with service levels provided? Not to a politically exposed person?  Beware of international and Chinese anti bribery laws. CV doesn’t need new fines, jailed managers, if not executed ones.

3. Conclusion. Manage risk. Start over again.

All in all, the Agreement is a poorly written document, barely a draft Executive Summary maybe, and an ill-conceived, -negotiated, and poorly defined undertaking. I guess Shearman & Sterling, which is a sterling law firm, was only minimally involved in the production of this document, and even worse, was not involved in advising what the deal could be and should be. They would certainly love to answer my  questions from a lay man and they have many more of their own.

There is also some more intangible political risk, as was the case with Qatar. We are not partnering with a Swiss or German entity. In this case we partner with one of a newly assertive super power, which leaves the political risk at the level of politics, preferences, and pragmatic choices for Luxembourg. Locally in Zhengzhou, CV will be associated with a project that will cover probably about 30km2 or more, going from the present one runway small airport to a multiple of four. It will have an important impact on zoning, and encroaching populations will have to be displaced, villages razed. This displacement may not become a major political issue though, as the local culture provides for a more docile acceptance for general interest projects, than it would in Luxembourg.


Maybe it is not too late to make corrections and fill in the blanks in the hollow Agreement, blanks about which I hope there is at least a consensus between both sides over answers, that there are common assumptions and at least verbal commitments at this stage. HNCA has shown a positive attitude, and will be glad to learn and understand. In particular, that there is no mention, no declaration, no formal guarantee to alleviate the rightful concerns of the Luxembourg employees, tax payers and other stakeholders when it comes to their future.



Friday, December 6, 2013

Cargolux in a Chinese deal
















My Orchids. Cattleya. Photo ET

Cargolux in a Chinese deal

 Cargoforwarder summarizes the latest newsquite accurately. In a nutshell, the new government has made the decision to go ahead with the planned deal with HNCA. It also gave the employees most of the guarantees they wanted, though not yet in writing. One sticky point was remaining for OGBL, the largest union: the 35% ownership for HNCA comes with an effective veto right in the decision making, and the union sees there the potential for irreparable harm.

This is indeed a matter of trust, that usually doesn't come as a free gift, but is something that builds gradually. Before that, one has to get the legal ducks in a row.

So by now the decision to go ahead is more of a political decision than a commercial one at this stage. Alarms went off when in the background of the agreement, TNT emerged as a competitor with a piece of the local market, several months ahead of CV's flights. It went against the assumption that in the local Henan economic practice, that should not have happened. Is it therefore that another piece of the market, the X-Box has been allocated to CV? It helps to complain, isn't it?

Two more things:

- the contract is expected to be signed by February - March. So, tell me again, what was the rush attempting to get this signed even before the elections? The delay is welcome, because the legal counsel has a list of details to iron out.

-this one makes me chuckle: one reason for the pressure to rush this, was the argument that the government could not hold on to its shares, because of the nasty looks from Brussels. The government however will stay on as a 10% shareholder. So either the former government lied, and there was no need at all for it to get out of CV. Or Brussels still has that nasty look, but the new government has decided that it doesn't care. In that case, good for them! What is good for Fortis-BIL is good for Cargolux.