Why market fears of an Air China takeover of Cathay Pacific proved unfounded

The Cathay bailout was, in the end, remarkably similar to those of other airlines around the world

Air China, Cathay’s second-largest shareholder, is facing a coronavirus crisis and any rescue plan could also have jeopardised the city’s aviation rights

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Cathay Pacific planes sit idle at the Hong Kong International Airport amid the coronavirus pandemic. Photo: Sam Tsang

Published: 9:30am, 15 Jun 2020Updated: 9:59am, 15 Jun 2020

When trading in Cathay Pacific shares was suspended early last week, the local stock market rumour mill went into overdrive. Foremost was speculation over whether Air China, the second-largest shareholder in the airline after Swire Pacific, might be riding to the rescue.

As Forbes magazine noted, this is the “default rumour” whenever Cathay Pacific has news lined up – ever since Air China first took a stake in 2006, and in particular since in 2009 it bumped up against the 29.99 per cent maximum stake it could hold without making a full bid for the company. But, as usual, the rumour was incorrect.

The Cathay bailout was in the end much more straightforward, and remarkably similar to airline bailouts that have recurred across the world as the global pandemic grounds the aviation industry, with no prospect of a recovery being mounted.

Recognising the indispensable role the airline plays at the heart of Hong Kong’s business economy, it was logical and perhaps inevitable that the Hong Kong government should come to the rescue. As the grounded airline was losing in the region of HK$3 billion or US$387 million a month, the question was not whether Cathay would need rescue, but what the size and the structure of the package would be.

By pumping HK$19.5 billion into the airline through a new company, Aviation 2020, the Hong Kong government is taking a 6.08 per cent stake in preferential shares with restricted voting rights, and with warrants that could lift the equity investment by a further HK$1.95 billion.

A bridging loan of HK$7.8 billion lifts the government package to around HK$29 billion. A rights issue for other shareholders could raise a further HK$11.7 billion.

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