Hong Kong government leads $5bn bailout of Cathay Pacific

Linda J. Dodson

HONG KONG — The government of Hong Kong will lead a $5.02 billion recapitalization of Cathay Pacific Airways under a plan unveiled on Tuesday to tide the city’s ailing flagship carrier through the impact of the coronavirus pandemic.

The airline said the government aid package will consist of 19.5 billion Hong Kong dollars ($2.52 billion) from the issuance of preferred shares and HK$7.8 billion in bridge loans. Existing major shareholders Swire Pacific, Air China and Qatar Airways will join the capital call by subscribing to a HK$11.7 billion rights issue, bringing the total package to HK$39 billion.

“Quite frankly, without this plan, the alternative would have been a collapse of the company,” Cathay Pacific Chairman Patrick Healy told reporters in a conference call, adding that commercial debt markets are “effectively closed to airlines today” that lack government support.

The bailout comes as airlines around the world strain to survive the suspension of most of their operations due to bans imposed by governments on incoming foreign visitors to try to halt the spread of COVID-19, as well as consumer fears about catching the virus in-flight.

Within the region, Thai Airways sought bankruptcy court approval for a restructuring plan last month while Virgin Australia was forced into court-managed administration in April and is seeking new owners.

Unlike many of its Asian peers, Cathay Pacific has been under private control since its founding in colonial Hong Kong in 1946 by Britain’s Swire Group. Until recently, the city held itself to be an exemplar of free market policy though the government has long owned the city’s two theme parks.

“It is absolutely historic for the Hong Kong government to issue such a large bailout package for a single company,” said Luya You, an aviation analyst with Bocom International in Hong Kong. “Cathay has (now) been flagged as an essential firm to Hong Kong’s economy.”

Cathay began discussions with the government about potential investment in the airline two months ago, according to a briefing paper submitted to the legislature on Tuesday.

“The investment would… enable the group to compete on par with other airlines receiving respective government support in the upcoming recovery of air services, thereby reinforcing Hong Kong’s strengths as an international aviation hub,” the paper said. “More importantly, it will preserve the necessary conditions and provide impetus to the much-needed post-COVID-19 revival of the Hong Kong economy.”

With the rights issue, Swire would maintain its 45% stake in Cathay’s common stock while Air China will stay at 29.99% and Qatar Airways at 9.99%. If the government exercises share warrant rights under its aid plan, it will acquire a 6.08% stake in the common shares while the others’ interests are slightly reduced.

Disruption to travel from seven months of political protests in Hong Kong had already pushed down Cathay’s net profit by 27.9% last year to HK$1.69 billion. To cope with COVID-19, Cathay had since February slashed passenger operations by 97% and made other operating cost cuts. The airline said Tuesday, however, that it “has been losing cash at a rate of HK$2.5 billion to HK$3 billion per month.”

While the Hong Kong government did not step in when Cathay was hit by the SARS outbreak in 2003 or in other crises, Andrew Yuen, associate director of the Aviation Policy and Research Centre of the Chinese University of Hong Kong, said COVID-19’s impact has been much bigger.

“The aviation sector is really important to the (Hong Kong) economy,” he said. “If there is no Cathay, then probably we will not have any hub in Hong Kong.”

Hong Kong Airlines, Cathay’s only surviving locally based competitor, had until now been seen in more desperate straits than Cathay, but Financial Secretary Paul Chan said Tuesday that the government has “no intention” to rescue that airline, calling its size and network “incomparable” to Cathay’s in terms of preserving Hong Kong’s status as a transport hub. Hong Kong Airlines is controlled by China’s heavily indebted HNA Group.

Cathay said that alongside the bailout, it “intends to implement a further round of executive pay cuts” and to ask staff to take an additional three weeks’ unpaid leave while working toward completing a reevaluation of the “optimum size and shape” of the group by year-end.

“Inevitably this will involve rationalization of future planned capacity compared to the pre-crisis plans,” it said.

Healy said: “In terms of commitments to the future, we can’t take anything off the table.”

Jeremy Tam, a legislator who worked as a Cathay pilot until last year, said that while he was concerned the government would lack sufficient leverage to ensure repayment of its aid, he hoped the support would enable the airline to avoid further cuts to staff pay or jobs.

The government is to place two observers on Cathay’s board under the bailout plan. Bernard Chan, a financier and member of Hong Kong Chief Executive Carrie Lam’s Executive Council, is already an independent director of the company.

Paul Chan, the finance secretary, said the government would not “interfere with the operation and management” nor “become a long-term shareholder.”

Kelvin Lau of Daiwa Capital Markets said he was surprised how much support the government is providing, estimating it could enable Cathay to “survive for around three years or (then) some.”

Trading in Cathay, Swire and Air China shares in Hong Kong was halted Tuesday morning and is expected to resume on Wednesday. Cathay shareholders are to vote on the recapitalization plan on July 13.

In a separate statement Tuesday, Swire said it “fully supports the recapitalization plan” and maintained “an unwavering commitment to the group.”

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