The Hong Kong government said it plans to bail out embattled Cathay Pacific Airways with a rescue package worth HK$39 billion($5.03 billion) in a rare move to directly help the beleaguered airline.
Discussing the plan on Tuesday, Financial Secretary Paul Chan Mo-po said:“ Cathay’s role as Hong Kong’s flag carrier is irreplaceable. …If it fails to continue as a going concern, Hong Kong’s status as a global aviation hub will certainly be impaired.”
The one and only goal of the (rescue) plan is to retain Hong Kong’s much-coveted title as a world-renowned aviation hub. This has already been under threat after the city faced two major blows: months of often-violent protests, and the subsequent novel coronavirus pandemic
Paul Chan Mo-po,
financial secretary
The proposed recapitalization plan, which the SAR government and Cathay began to consider about two months ago, includes the government purchase of HK$19.5 billion in preference shares and HK$1.95 billion in warrants by Aviation 2020 — a limited company owned by the government — as well as a HK$7.8 billion bridge loan.
Chan told a media briefing that as much as HK$27.3 billion will be financed under the Land Fund. The Land Fund, which totals about HK$220 billion, is currently placed with the Exchange Fund for investment purposes.
The financial secretary said an investment of this size is projected to generate an internal rate of return of 4 to 7.5 percent. This is much higher than the six-year moving average return of 3.7 percent that the investment portfolio of the Exchange Fund had achieved, he said.
The rescue package — well above Cathay’s current market capitalization of HK$34.7 billion — will put the government on course to become the airline’s fourth-largest shareholder, with a 6.08 percent stake.
Cathay’s major shareholders, Swire and Air China, will own stakes of 42.26 percent and 28.17 percent respectively once the recapitalization plan is completed.
As part of the deal, the government will send two observers from the professional or business sectors to sit on Cathay’s board to safeguard the government’s interests.
Chan reiterated that the government had no intention of getting involved in Cathay’s daily business operations and management or to hold a long-term stake in the airline.
He said the “one and only” goal of the plan is to retain Hong Kong’s much-coveted title as a world-renowned aviation hub. This has already been under threat after the city faced two major blows: months of often-violent protests, and the subsequent novel coronavirus pandemic.
Cathay contributed 57 percent of overall passengers and 41 percent of freight carried at Hong Kong International Airport before the pandemic.
Among Hong Kong’s extensive air network of over 220 destinations worldwide, as many as 49 passenger points and 14 all-cargo points are served exclusively by Cathay.
The airline, with a respected international reputation, was founded in 1946.
Well before the coronavirus spread around the world, Cathay had been embroiled in ongoing violent protests in the city. These affected traffic numbers and led to the departure of the company’s then-CEO.
The coronavirus pandemic has frozen global travel for months. Chan said that Cathay had been particularly hard-hit as it has no domestic market to fall back on.
“This is why Cathay has suffered a whopping 97 or even 99 percent plunge in passengers carried over the past few months — a truly horrible situation never seen before,” he said.
Chan said the government will keep Cathay shares for three to five years as a medium-term investment. He believes the rescue plan will help Cathay compete on a par internationally with other airlines, most of which are already receiving various forms of financial support from their respective governments.
Governments have committed $123 billion in financial aid to airlines around the world, the International Air Transport Association said in a report in May.
In a filing to the Hong Kong Stock Exchange on Tuesday, Cathay welcomed the government’s rescue efforts but added that it still doesn’t see light at the end of the tunnel.
Cathay Pacific Chairman Patrick Healey said in a statement: “Despite all these measures, the collapse in passenger revenue to only around 1 percent of prior-year levels has meant that we have been losing cash at a rate of approximately HK$2.5 billion to HK$3 billion per month since February. The future remains highly uncertain.”
As well as the proposed recapitalization plan, Cathay Pacific Airways senior management will take a new round of pay cuts. The airline also will ask many of its 27,000-strong staff to take a second round of unpaid leave.
Cathay Pacific Airways and major shareholders Swire Pacific and Air China halted trade of their shares in Hong Kong on Tuesday morning. Trade will resume when the market opens on Wednesday morning.
The airline reported an unaudited loss of HK$4.5 billion over the first four months of 2020. It posted a massive 99.6 percent plunge in passengers carried in April, compared with 3.12 million customers carried in the same month last year — the steepest drop ever recorded by the airline.
Cathay chief customer and commercial officer Ronald Lam Siu-por warned last month of a very serious outlook “for the coming months at least” due to the “biggest challenge to aviation we have ever witnessed”.
