Hong Kong has agreed to lead a HK$39 billion ($5 billion) recapitalization effort for flag carrier Cathay Pacific, marking the latest case of a government taking an equity stake in a private airline to help keep it afloat during the Covid-19 pandemic. In a Tuesday filing with the Hong Kong Stock Exchange, Cathay said the government would provide a HK$27.3 billion package consisting of a HK$7.8 billion bridge loan and HK$19.5 billion in preferred share repurchases. The HK$11.7 billion balance would come from the issuance of new stock.
The resulting entity, named Aviation 2020 Limited, would hold the right to appoint observers to attend board meetings and gain access to management information for as long as it remains a preferred shareholder or any amount of the bridge loan remains outstanding.
In its filing, Cathay Pacific blamed travel restrictions by various governments leading to severely reduced traffic to and from Hong Kong for uncertainty over its future operations.
“Cathay Pacific has explored available options and believes that a recapitalization is required to ensure it has sufficient liquidity to weather this current crisis,” said the airline in a statement. “In addition, it is expected to place Cathay Pacific in a better position to compete vigorously and to capitalize on any opportunities that may arise as a result of the current crisis and should position Cathay Pacific for growth when the crisis resolves."
The airline added that its board plans to implement another round of executive pay cuts and a second voluntary special leave plan for employees, as well as to “reevaluate all aspects of the Cathay Pacific Group’s business model to meet the air travel needs of Hong Kong while keeping Cathay Pacific’s financial status at a healthy level and meeting its responsibilities to shareholders.”
Given its position on the island territory, Cathay cannot rely on any domestic passenger revenue, meaning measures that hinder international travel result in a particular hardship for the airline. Since the start of the Covid crisis, Cathay Pacific Group has cut passenger capacity by 97 percent, resulting in a fall in passenger revenues to about 1 percent of its 2019 levels and a cash drain of HK$2.5 to HK$3 billion a month since February.
Plans beyond the executive pay cuts and second voluntary leave proposal include a recommendation to the board in the fourth quarter of this year as to the optimum size and shape of the group in general. Inevitably, it said, that would lead to a “rationalization” of future capacity to account for future business conditions.