Explainer | Why Cathay Pacific’s bailout was not just important for the airline but Hong Kong as a whole
- Financial Secretary Paul Chan said city’s air network underpinned range of industries including financial services and tourism
- Air cargo reached 500 million tonnes in 2018 and was worth US$473 billion to Hong Kong
Here is why the bailout plan was important, not only for the survival of the city’s flagship carrier but also its status as a leading international aviation hub.
01:27
HK$30 billion bailout for Cathay Pacific is necessary, Hong Kong government says
Why was there a government bailout?
The airline has been losing money at a rate of HK$2.5 billion to HK$3 billion per month since February and passenger capacity has also plummeted by 97 per cent, according to an exchange filing on Tuesday.
Financial Secretary Paul Chan Mo-po said the objectives for the bailout were to help protect Hong Kong’s role as a leading international aviation hub, as well as the city’s long-term overall economic development, while generating a reasonable return for the government.
“Our comprehensive international air network not only facilitates the flow of passengers and cargo through Hong Kong, but also underpins the development of a wide spectrum of economic activities, notably trading and logistics, finance services and tourism,” he said.
According to the International Air Transport Association, the aviation sector employs about 330,000 jobs in the city and generates 4.9 per cent of gross domestic product.
Chan said it was crucial to protect Cathay, which before the coronavirus had exclusive services in more than 49 passenger terminals and 14 cargo terminals, among the 220 terminals worldwide. At Hong Kong airport, it occupied 57 per cent and 41 per cent of passengers and cargo flow respectively.
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How does the bailout work?
Cathay Pacific will raise HK$39 billion (US$5 billion) from selling its shares to the government and shareholders.
As part of the deal, the airline will sell HK$19.5 billion in preferential shares – equity with restricted voting rights – along with warrants of up to HK$1.95 billion to the government.
The government, through a new company called Aviation 2020, will buy a 6.08 per cent stake in Cathay, using reserves from the land fund to make the purchase.
It will also gain two “observer” seats which do not carry voting rights on the airline’s board of governors.
These seats will be filled with professionals and not officials, and Chan said the government did not want to be involved in the management or daily operations of the airline.
Meanwhile, existing shareholders Swire Pacific, Air China and Qatar Airways have also subscribed to a HK$11.7 billion rights issue, and their stake in Cathay has been diluted.
03:42
Hong Kong flagship airline Cathay Pacific hit with financial trouble amid coronavirus outbreak
How far the bailout will save Cathay?
In the most basic sense, the bailout means Cathay Pacific avoids bankruptcy. The rescue package allows the airline to survive for now, and to plan out its future with the help of the government.
The move has also given employees a temporary sense of relief that the airline will not go under, but staff are still disappointed the company did not guarantee job security, said Amber Suen, vice-chairwoman of the Cathay Pacific Flight Attendants’ Union, representing about 7,400 Hong Kong-based crew members.
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What if Cathay had not been bailed out?
Chan said Cathay’s role was unique to Hong Kong, and he pointed out that the airline had flown 1,000 flights through 220 terminals per day before the pandemic, and had all these aviation rights.
If Cathay failed, some of the company’s aviation rights might be surrendered to other competitors, such as mainland China, Chan said.
Aviation also plays a crucial role in Hong Kong’s economy. Cargo quantity at Hong Kong International Airport reached 500 million tonnes in 2018, which is worth US$473 billion, or roughly 40 per cent of Hong Kong’s total trade.
03:51
Tracking the massive impact of the Covid-19 pandemic on the world’s airline industry in early 2020
How have other countries saved their aviation sectors?
With the coronavirus still hammering the industry, at least 65 global airlines slashed flights by about 95 per cent in April and May.
Regionally, state-owned Temasek Holdings unveiled a US$13.3 billion rescue package for Singapore Airlines in late March.
Lufthansa Group is set to get US$12.3 billion from the governments of its national airlines in Germany, Switzerland, Belgium and Austria, which includes US$9.8 billion from Berlin. The German government will get a 20 per cent stake, and two boardroom seats filled by independent experts.
Air France-KLM, one of Europe’s largest airlines, won approval from the European Union for a 7 billion euro (US$7.7 billion) French aid package.
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What challenges has Cathay Pacific faced in recent years?
What impact will the bailout have on Hong Kong’s tourism industry?
In the first four months of this year, tourist arrivals to Hong Kong plunged 85.3 per cent to 3.49 million year on year because of the coronavirus.
“If the aviation industry crumbles, it does not only hurt the tourism sector of Hong Kong,” said Perry Yiu, convenor of the Hong Kong Travel Agents’ Relief Alliance.
“Commercial activities ranging from business trips to trade and even visiting relatives overseas will become very difficult.”
