Cathay slides on talk of new share issue
Cathay Pacific Airways' stock price slumped yesterday on concerns the company may issue new shares to raise funds to combat its accelerating debt ratio.
Although the management reiterated at its results briefing on Wednesday that it had no immediate plans to tap the market, analysts detected a change in tone that the carrier was becoming more amenable to the suggestion.
'[The management] no longer rules out an equity issue ... We believe Cathay is sensible to be considering this option,' a Citigroup report said yesterday.
The net debt to equity ratio surged to 81 per cent at the end of June from 69 per cent at the end of the first half last year, with Citigroup predicting Cathay would spend more than HK$10 billion by the end of 2010.
Shares in Cathay tumbled 3.61 per cent to HK$11.74 yesterday. However, they are still up 34.63 per cent year to date on hopes of a recovery in the global economy.
For Cathay to raise funds through a rights issue, it would have to clear a major obstacle in the shape of major shareholders Air China and Citic Pacific. Together, they own a combined 35 per cent stake in Cathay and are unlikely to agree to subscribe new shares due to their own financial problems.
Meanwhile, overcapacity in the airline industry globally is making Cathay's management cautious about the outlook. Recovery in the airline's yields is slow and shallow, mirroring the same recovery pattern in the real economy, said a UBS report.
The slump in premium customers is bottoming out this quarter, but Cathay said it would review the configuration of the front end of its cabins if demand did not return.
Some banks such as JP Morgan and Nomura have started to relax their restrictions on business-class flights for their executives.
'I think the investment banks will continue to downgrade flights under three hours to economy class for a long time for the sake of cost-saving,' said Karen Chan, a transport analyst for RCM. It is viable for Cathay to get rid of their business seats on single-aisle aircraft which cater for short-haul flights, she said.
Three-quarters of Cathay's 20 top corporate clients come from the financial sector. Deteriorating demand for premium travel and ticket price cuts have sent Cathay's passenger yield, which refers to revenue per seat per kilometre, down 20 per cent in the first half from a year ago.
