Cathay Pacific will undergo a HK$39 billion (US$5 billion) capital restructuring exercise as the Hong Kong government works to keep the city’s flag carrier alive as the COVID-19 pandemic continues to hammer the global aviation industry. At a press conference held after the Hong Kong market close, Cathay Pacific Chairman Patrick Healy and other officials said the airline group approached the Hong Kong government to ask for aid and that without the capital infusion, the airline would have “collapsed”, according to Healy. He added that the recapitalisation was designed to help Cathay “survive the industry downturn”, which has been and continues to be “the most challenging period” in Cathay’s 70-year history.
The restructuring includes the use of “preference shares” worth HK$19.5 billion; warrants to subscribe for shares worth HK$1.95 billion; a rights issue worth HK$11.7 billion; and a bridge loan worth HK$7.8 billion, according to the airline’s filing with the Hong Kong Stock Exchange (HKEX) at midday Tuesday (9 June). The news was first reported the South China Morning Post Tuesday morning, which said in its report that this”is the first time the government has directly injected money into a private company”.
Healy added: “We are grateful to the HKSAR government’s capital support, which allows Cathay Pacific to maintain our operations and continue to contribute to Hong Kong’s international aviation hub status. We are also grateful to our shareholders for their confidence in the long-term future of Cathay Pacific and in the ability of Cathay Pacific’s management team to lead our airlines through what is the most challenging period in the group’s history.” Cathay Pacific has been “agile in responding to this unprecedented crisis and has remained focused on cash conservation,” the company said in a statement after its filing with the HKEX. “The many actions it has taken to preserve cash have included cutting passenger capacity by 97 percent, implementing executive pay cuts, deferring new aircraft orders and carrying out the early retirement of older aircraft, as well as implementation of a voluntary special leave scheme, which had an 80 percent employee uptake”.
To download Cathay Pacific’s stock exchange filing, click here.
“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, and the future remains highly uncertain,” Healy said. “The infusion of new capital that we have announced today does not mean we can relax. Indeed quite the opposite. It means that we must redouble our efforts to transform our business in order to become more competitive. Today we have announced a new round of executive pay cuts, and a second voluntary special leave scheme for our employees.”
Healy said the airline group had been burning through HK$2.5-$3 billion per month after starting the year with HK$20 billion in “unrestricted liquidity” and without the government’s cash injection, “we would have been very shortly running out of cash and close to collapse…it was absolutely necessary to the survival of Cathay Pacific” for the government to intervene, he said.
Trading was suspended on Tuesday morning while Hong Kong Chief Executive Carrie Lam, met with the Executive Council, her de facto cabinet, to get final approval the bailout. Cathay, like airlines around the world, has seen its flights cut dramatically, as much as 96 percent at one point, because of the pandemic that forced countries around the globe to close their borders and enforce a variety of quarantine measures. It is only the latest airline to receive a government bailout rather than face bankruptcy like Virgin Australia. Cathay is owned Swire Pacific, one of the oldest of Hong Kong’s legendary trading houses, as well as partly owned by Air China and Qatar Airways.
Cathay told the HKEX the recapitalisation “is proposed in response to a series of unexpected events outside the Cathay Pacific Group’s control, including the outbreak of the global COVID-19 pandemic, which has created significant challenges for the airline industry. Travel restrictions imposed by various governments have led to significantly reduced inbound and outbound passenger traffic for the Cathay Pacific Group and uncertainty over the Cathay Pacific Group’s future prospects and operations.”
Cathay said it has explored other available options and it “believes that a recapitalisation is required to ensure it has sufficient liquidity to weather this current crisis. In addition, it is expected to place Cathay Pacific in a better position to compete vigorously and to capitalise on any opportunities that may arise as a result of the current crisis and should position Cathay Pacific for growth when the crisis resolves”.
Cathay said in addition to the financial injection, the company “intends to implement a further round of executive pay cuts and a second voluntary special leave scheme for employees and, in the longer term, to re-evaluate 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”.
- IATA coronavirus resource centre
- ICAO coronavirus resource centre
- Air Cargo COVID-19 Action Page
- IATA TACT COVID-19 Operational Impact Portal
- IATA Quick Reference for Ground Handling During COVID-19
- IATA Guidance on the Safe Carriage of Cargo in the Passenger Cabin
- WHO: Coronavirus disease (COVID-19) Pandemic
- International Society for Infection Diseases COVID-19 Page
The Cathay filing also says the recapitalisation will create a new group representing the Hong Kong government called “Aviation 2020 Limited” and that group will have the right to appoint two observers to attend board meetings and have access to management and information for as long as Aviation 2020 Limited remains a holder of any of the preference shares or any amount under the bridge Loan remains outstanding.
Swire Pacific will remain as a controlling shareholder of Cathay Pacific and agreed in the filing to remain the controlling shareholder while the recapitalisation is in force.
By the fourth quarter, Cathay Pacific’s 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”, the company said.
“We are in a very dynamic situation,” Healy added. “We need to make the right decisions to adapt to the new reality of global aviation and secure our long-term future. This will require re-evaluating all aspects of our business model in light of the rapidly changing macro and industry dynamics. Inevitably this will involve rationalisation of future planned capacity compared to our pre-crisis plans, taking into account the market outlook and cost structure at that time.”