Cathay Pacific got major backing from the Hong Kong government for its HK$40 billion (US$5.2 billion) restructuring program meant to keep the airline afloat while it continues to be battered by the impacts of the coronavirus.
The Hong Kong government will inject HK$30 billion (US$3.9B) to the city's flag carrier in loans for an undisclosed stake — the first time that the city's government has directly funnelled funds into a private company.
The Swire Group currently owns the majority of Cathay Pacific (45%) while Air China owns 29.99% and Doha-based Qatar Airways also owns 9.99% stake in the airline.
Reports noted that Cathay Pacific's HK$40 billion capital restructuring exceeds its very own market capitalization which is pegged at HK$34.6 billion (US$4.46 billion).
SCMP reported that the Hong Kong government decided to rescue the embattled airline in order to maintain Hong Kong's status as a regional aviation hub and to save the gateway's hard-earned aviation rights, and important routes and flights.
Trading of Cathay shares was suspended on Tuesday as Hong Kong's Chief Executive Carrie Lam sought final approval for the rescue deal.
Reuters reported separately that the Hong Kong government does not intend to hold the stake at Cathay Pacific for a long term citing Finance Secretary Paul Chan.
The HK government also have no plans to get involved in the company’s operations.
Recapitalisation plan
In a separate statement, Cathay Pacific said the recapitalisation plan will help the embattled Cathay Pacific maintain its competitiveness and operations while continuing its commitments to Hong Kong as international aviation, financial and commercial hub.
Part of the airline's three-part plan is the issuance of HK$19.5 billion in preference shares with detachable warrants to the Hong Kong Special Administrative Region (HKSAR) Government after requisite shareholders’ approval has been obtained; launch a HK$11.7 billion rights issue of shares to existing shareholders after requisite shareholders’ approval has been obtained; and the HKSAR Government will provide a HK$7.8 billion bridge loan facility to Cathay Pacific, available for drawdown immediately.
"This three-part plan is designed to provide Cathay Pacific with sufficient funds to withstand the industry-wide downturn, and a stable financial platform from which it will be able to conduct the wholesale review of operations required to transform its business to reflect the new global travel market dynamics," the Hong Kong flag carrier said.
Cathay Pacific Chairman Patrick Healy welcomed the government's support noting how the capital infusion will allow the airline to maintain our operations and continue to contribute to Hong Kong’s international aviation hub status.
More vulnerable than peers
Cathay Pacific has experienced a number of challenges since 2019. Positive momentum from 2018 drove a strong first-half result in 2019. However, since mid-2019, the social situation in Hong Kong led to a sharp decline in passenger traffic and this challenging environment was exacerbated by the outbreak of the COVID-19 pandemic.
Most industry analysts are forecasting very gradual recoveries over a protracted period, and the International Air Transport Association (IATA) is forecasting that it will be 2023 at the earliest before international passenger demand returns to pre-crisis levels.
"Cathay Pacific is even more vulnerable than most of its global airline peers, given that its airlines have no domestic network and are wholly reliant on cross-border travel. That travel remains highly restricted and subject to quarantine constraints, with no prospects for a return to normal international travel arrangements anytime soon," the airline said.
Focus on cash conservation
Cathay Pacific said it has been agile in responding to this unprecedented crisis and has remained focused on cash conservation — which included measures such as cutting passenger capacity by 97%, implementing executive pay cuts, deferring new aircraft orders and carrying out the early retirement of older aircraft, as well as the implementation of a voluntary special leave scheme, which had an 80% employee uptake.
Healy said despite all these measures, the collapse in passenger revenue to only around 1% of prior-year levels has meant that Cathay has been losing cash at a rate of approximately HK$2.5 billion to HK$3 billion per month since February, and "the future remains highly uncertain."
"The infusion of new capital that we have announced today does not mean we can relax. Indeed quite the opposite. It means that we must redouble our efforts to transform our business in order to become more competitive," he added.
By the fourth quarter of this year, the Cathay Pacific management team will also recommend to the board the optimum size and shape of the Cathay Pacific Group to meet the air travel needs of Hong Kong while keeping the company’s financial status at a healthy level.
“We are in a very dynamic situation. We need to make the right decisions to adapt to the new reality of global aviation and secure our long-term future. This will require re-evaluating all aspects of our business model in light of the rapidly changing macro and industry dynamics," Healy said.
Significant short-term challenges
“Inevitably this will involve rationalisation of future planned capacity compared to our pre-crisis plans, taking into account the market outlook and cost structure at that time.”
He added: “Tough decisions will need to be made in the fourth quarter of this year to get Cathay Pacific to the right size and shape in which to compete successfully and thrive in this new environment but once we have right-sized the airlines to adapt to our new reality, our long-term prospects remain as bright as ever.”
h an outstanding 70-year-old brand, a world-beating premium service offering through Cathay Pacific and Cathay Dragon, together with a newly acquired low-cost carrier in HK Express with a very exciting future, and an unrivalled position in the Greater Bay Area, a region which will be the growth engine for the world economy over the next few decades. Our short-term challenges are significant, but our long-term future remains bright.”
As a responsible company, Cathay Pacific noted that it will continue to explore opportunities to improve its capital structure.
"If suitable market conditions arise, we may further access the equity and debt capital markets in order to strengthen our balance sheet," it added.