Advertisement
Advertisement
Cathay Pacific
Get more with myNEWS
A personalised news feed of stories that matter to you
Learn more
Cathay’s restructuring package marks the first time the Hong Kong government has directly injected money into a private company. Photo: Felix Wong

Goal of massive Cathay bailout is to protect Hong Kong’s role as global aviation hub and ensure city’s economic future, finance chief says

  • Hong Kong officials view Cathay’s possible collapse as a fundamental threat to the city’s aviation sector
  • Government will provide a lifeline of HK$27.3 billion, representing 1.5 times the company’s market capitalisation, as part of a HK$39 billion rescue
The Hong Kong government is leading a massive HK$39 billion (US$5 billion) bailout of struggling Cathay Pacific, taking a sizeable stake to save the city’s aviation industry as the coronavirus pandemic grinds international travel to a halt.

With the airline controlling more than half of passenger traffic and carrying nearly two-fifths of cargo in the Asian financial hub, officials viewed Cathay’s possible collapse as a fundamental threat to its aviation sector. 

Under the recapitalisation plan unveiled on Tuesday, the government will provide a lifeline of HK$27.3 billion, representing 1.5 times the company’s market capitalisation, and take a 6.08 per cent stake.

01:29

Hong Kong government to bail out Cathay Pacific with HK$30 billion in loans and direct stake

Hong Kong government to bail out Cathay Pacific with HK$30 billion in loans and direct stake

The goal of the bailout is to protect Hong Kong’s role as a global aviation hub and ensure the city’s long-term economic development, while generating a reasonable return for the government, according to Financial Secretary Paul Chan Mo-po.

“It’s not a random person or a random company,” Chan said. “We have to safeguard [the city’s] aviation rights, otherwise this will cause systematic risk.”

If Cathay failed to operate flights and maintain routes, Hong Kong could be forced to surrender air traffic rights to competitors in mainland China and overseas.

“If this challenge is not properly addressed, it would harm Hong Kong’s international aviation hub status, and adversely impact other economic activities, to the detriment of the overall interest of Hong Kong,” he said.

Governments around the world are moving to prop up national carriers after the Covid-19 pandemic forced the closure of borders and saw the demand for travel evaporate. According to Cathay chairman Patrick Healy, commercial debt markets were not interested in taking a stake in an airline, leaving no alternative but the government-led bailout.

“The reality is the recapitalisation plan is the only plan available to Cathay Pacific,” Healy said. “What would the alternative have been? Well, quite frankly without this plan, the result would have been the collapse of the company.”

International air travel is creeping back with ‘bubble’ corridors

As part of the deal, the government will create a new company called Aviation 2020 to buy HK$19.5 billion (US$2.5 billion) in preferential shares – equity with restricted voting rights – and warrants for as much as another HK$1.95 billion purchase of shares later. It will also offer a HK$7.8 billion bridging loan. The size of the government’s deal could eventually rise to HK$29.2 billion, according to the airline.

The government would only take the 6.08 per cent stake if the warrants were fully exercised.

03:42

Hong Kong flagship airline Cathay Pacific hit with financial trouble amid coronavirus outbreak

Hong Kong flagship airline Cathay Pacific hit with financial trouble amid coronavirus outbreak

Existing shareholders Swire Pacific, Air China and Qatar Airways will subscribe to a fresh HK$11.7 billion rights issue, which will dilute their stake, but ultimately leave Swire with 42.26 per cent, Air China 28.17 per cent and Qatar Airways 9.38 per cent.

The government will also gain two “observer” seats on the board of directors, which it will fill with professionals and not officials. Chan insisted it did not want to get involved in the management or day-to-day operation of the airline. But the seats, which do not carry voting rights, will still give officials a say on the company’s corporate affairs.

“It is not our intention to become a long-term shareholder of Cathay Pacific,” he told reporters. “It is not our intention to interfere with the operation and management of Cathay.”

We have to safeguard [the city’s] aviation rights, otherwise this will cause systematic risk
Paul Chan, financial secretary
Trading in Cathay shares was suspended on Tuesday morning while Hong Kong leader Carrie Lam Cheng Yuet-ngor met the Executive Council, her de facto cabinet, for final approval of the package.

The rescue, which marks the first time the government has taken a direct stake in a private company, will be financed by the Land Fund, which is managed under the Exchange Fund.

Hong Kong Covid-19 lab in talks with Cathay on testing, reviving flights

The government plans to hold onto the shares for three to five years, describing it as a medium-term investment that was expected to generate an internal rate of return of between 4 and 7.5 per cent, higher than the Exchange Fund’s 3.7 average over the past six years.

“Such an investment meets the target of the Land Fund, which is to generate a reasonable return,” Chan said.

Cathay Pacific has about half of the runway slots at Hong Kong International Airport. Photo: Bloomberg

The aviation sector supports roughly 330,000 jobs in the city, and along with foreign tourism as a whole accounts for 4.9 per cent of gross domestic product, according to the International Air Transport Association.

Cathay controls about 50 per cent of runway slots at Hong Kong International Airport and has grown into one of Asia’s largest international airlines and the fifth-largest air cargo carrier globally.

Pilots in firing line as Cathay Pacific hints at further job losses

But the coronavirus pandemic, which has threatened the survival of even dominant players in the industry, has financially battered Cathay, with passenger revenue dropping more than 99 per cent since the health crisis began compared to the same period last year.

Swire Pacific, which would spend HK$5.3 billion on buying new shares, said it fully supported the recapitalisation plan and pointed to the airline’s “critical role” in Hong Kong and the region.

“We have full confidence in the long-term future of Cathay Pacific Group and the important role it plays within Hong Kong,” Swire said.

03:51

Tracking the massive impact of the Covid-19 pandemic on the world’s airline industry in early 2020

Tracking the massive impact of the Covid-19 pandemic on the world’s airline industry in early 2020

Despite the fresh injection of capital, the company would still need to make some “tough decisions” going forward, Healy said.

Cathay will undertake a complete re-evaluation of its business model to determine its optimal size and shape by the fourth quarter of this year, but it did not expect any “meaningful recovery” for some time.

At the height of Hong Kong’s political unrest last year, Cathay came under intense scrutiny from China’s civil aviation authority after some staff members took part in anti-government protests.

Cathay airlines report combined HK$4.5 billion loss for start of 2020

Sweeping changes at the top of management soon followed, including the resignation of CEO Rupert Hogg and his deputy Paul Loo Kar-pui, with long-time chairman John Slosar retiring not long after.

When asked whether there was any political agenda behind the government’s move, Chan said there was only one reason for the decision.

“The bailout was intended to maintain the city’s status as a major international aviation hub,” he said. “We do not have other thoughts and I would say there’s too much speculation if you believe the decision is related to politics.”

08:47

A year of anti-government protests in Hong Kong

A year of anti-government protests in Hong Kong

The government would leave running the airline up to the management, according to Chan.

“The government has no intention to inhabit Cathay, nor holding the company’s equity long-term. We would not participate in the company’s daily operation, he said.

Sources told the Post that Cathay had tried to secure loans from the private equity market but received no interest from bidders, given the political sensitivities surrounding its ownership.

Cathay operates 238 aircraft and carried 35.2 million passengers last year. Half of the airline’s HK$107 billion revenue last year came from Hong Kong and mainland China.

This article appeared in the South China Morning Post print edition as: Battered Cathay handed billions to avoid collapse
Post