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Broker's take: Jefferies says Cathay Pacific restructuring removes key overhang

Cathay Pacific check-in counters at HK airport - EPA.jpg
The restructuring will allow the Hong Kong flag carrier to lower its cash burn by HK$500 million a month. Cathay Pacific will cut headcount by 17 per cent.

CATHAY Pacific Airways' restructuring removes a key overhang for the airline, but earnings recovery will depend on the opening of the Singapore-Hong Kong air travel bubble (ATB), Jefferies' research team said.

Jefferies equity analyst Andrew Lee said Cathay Pacific's HK$2.2 billion (S$384.8 million) restructuring plans announced on Wednesday were broadly in line with expectations.

As part of the restructuring, Cathay Pacific will cut existing jobs by about 17 per cent. The Hong Kong flag carrier's regional arm, Cathay Dragon, will also cease operations, while Cathay Pacific's crew remuneration will be based on productivity.

The restructuring will allow the airline to lower its cash burn by HK$500 million a month, it said in a statement on Wednesday.

Although there are no surprises, the key question over the restructuring would be the positioning of Cathay Pacific-owned low-cost carrier HK Express, which will be given some unnamed Cathay Dragon routes, Mr Lee said.

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"Will these routes still operate business class? If yes, how does this change (HK Express') position as a low-cost carrier," he added.

Jefferies maintained "hold" on Cathay Pacific with an unchanged target price of HK$6.30 - based on trough 0.6-time price-to-book value, with passenger recovery dependent on Hong Kong's ATB with 11 other countries. However, the timing is still unknown, Jefferies noted.

Cathay Pacific shares were trading up 4 per cent or HK$0.23 to HK$5.95 as at the midday trading break on Wednesday.

Analysts from Jefferies and DBS recently identified Cathay Pacific and Singapore Airlines as beneficiaries of the upcoming two-way ATB between Singapore and Hong Kong. Other beneficiaries of the planned bubble between the two Asian financial hubs include hospitality players and Singapore-listed ground handler SATS .

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