Cathay Pacific gets a USD 5 Billion helping hand; HK Government will take a stake

Cathay Pacific has been one airline which has been massively affected for the last nine months or so. First, it was the Hong Kong Riots, then the pandemic, where the airline, which has huge Chinese patronage, got affected as well. Now, as the airline tries to stutter into a restart again, it has gotten a helping hand from the government in the process.

Cathay Pacific today announced a recapitalisation plan which should help the airline survive the downturn created by the CoVid related shutdown of air travel as well as the losses due to the riots. 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.

Recapitalising Cathay Pacific

The recapitalisation plan comprises of three parts:

  1. Cathay Pacific will issue HKD 19.5 billion (USD 2.52 billion)  in preference shares with detachable warrants to the Hong Kong Special Administrative Region (HKSAR) Government after requisite shareholders’ approval has been obtained.
  2. Cathay Pacific will launch an HKD 11.7 billion(USD 1.51 billion) rights issue of shares to existing shareholders after requisite shareholders’ approval has been obtained. Qatar Airways, Air China, Swire Group and the government are expected to participate in this round.
  3. The HKSAR Government will provide an HKD 7.8 billion (USD 1.01 billion) bridge loan facility to Cathay Pacific, available for drawdown immediately.

The collapse in passenger revenue at Cathay Pacific, to only around 1% of prior-year levels has meant that CX has been losing cash at a rate of approximately HKD 2.5 billion to HKD 3 billion per month since February.

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.

Cathay Pacific has been agile in responding to this unprecedented crisis and has remained focused on cash conservation. The many actions it has taken to preserve cash have included 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.

The Hong Kong government will end up with a roughly 6% stake in Cathay Pacific. It does not intend to be a long term owner in the airline and plans to exit the airline at a suitable time, perhaps in about five years or so. Additionally, the HKSAR government does not share its optimism for Hong Kong Airlines, which means, the competition to Cathay Pacific won’t be getting an investment from the government. The Government is also not planning to interfere in the day to day functioning of the airline.

Review of the Cathay Business Model

Subsequent to the investment, the airline is also reviewing its full business model. By the fourth quarter of 2020, the Cathay Pacific management team will 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, and at the same time meeting our responsibilities to our shareholders in the coming years.

As Cathay Pacific Chairman Patrick Healy said,

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, with 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.

Bottomline

This sounds like some good news is finally on its way for Cathay Pacific, which has been hit by bad news one after another for most of the past twelve months. But the airline would also have to take tough calls, perhaps about merging the Dragon brand into itself, the fate of the 777X aircraft it has on order and the premium nature of the airline itself in the coming months.

What do you think will change at Cathay Pacific in the day ahead?


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