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HK government to lead HK$39b rescue package for Cathay Pacific
CATHAY Pacific Airways Ltd became the latest global carrier to receive a lifeline to get through the coronavirus pandemic, with the chairman saying its plan to raise HK$39 billion (S$7 billion) from the Hong Kong government and shareholders was necessary to avoid collapse.
The beleaguered airline will sell HK$19.5 billion of preference shares along with HK$1.95 billion of warrants to the government. It also proposed a rights issue, reported earlier on Tuesday by Bloomberg News, to raise about HK$11.7 billion.
The plans are subject to shareholder approval at an extraordinary general meeting around July 13. A government-connected entity called Aviation 2020 Ltd also is extending a HK$7.8 billion bridge loan, the carrier said.
The government will own 6.08 per cent of Cathay through Aviation 2020 after the deal and have two observers on its board. The airline will cut executives' salaries and offer more unpaid leave to its workers, and job cuts are possible.
"The reality is that the recapitalisation plan announced today is basically the only plan available to Cathay Pacific," chairman Patrick Healy said. "The alternative would have been a collapse of the company."
Airlines around the world have been searching for funds after the coronavirus wiped out passenger demand and grounded fleets.
Governments have devoted more than US$85 billion to propping up the industry, including the major US carriers and Germany's Deutsche Lufthansa AG, which secured about US$10 billion in state support.
Even so, global air traffic may only get back to 50-60 per cent of usual levels by year-end. "With the participation of the Hong Kong government in its capital reorganisation, the firm will be kept out of troubles like a cash squeeze at least in the coming months, and both its financial strength and credit rating will get a boost," said Steven Leung, executive director at UOB Kay Hian (Hong Kong) Ltd.
Cathay and main shareholders Swire Pacific Ltd and Air China Ltd suspended trading Tuesday, pending the announcement, and will resume on Wednesday. Air China owns about 30 per cent of Cathay, while Swire Pacific has a 45 per cent stake. Qatar Airways holds 9.99 per cent. All three have undertaken to vote in favor of all resolutions for the recapitalisation plan. Cathay posted an unaudited loss of more than HK$2 billion in February alone, and since then it has been losing HK$2.5-$3 billion a month.
"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," Mr Healy said. "Nothing is off the table."
The company may access equity and debt capital markets again to strengthen its balance sheet if conditions are right. Cathay shares are down 24 per cent so far this year.
The airline announced a new round of pay cuts and more unpaid leave for staff. Over 25,000 employees already agreed to an unpaid leave program in February that required them to take three weeks off between March 1 and June 30.
Mr Healy and chief executive officer Augustus Tang will take a 30 per cent pay cut, and other executives as much as 25 per cent. Other employees will be offered three weeks of unpaid leave to be taken over six months.
"These funds, along with other efforts like selling some of their planes and possible job cuts, could help tide them over for about two years," said Shukor Yusof, founder of aviation consulting firm Endau Analytics in Malaysia. "But the long-term view of Cathay remains uncertain."
Cathay isn't alone in seeking help. Singapore Airlines raised S$8.8 billion in a rights issue last week and has since secured new credit lines and loans, while South Korean authorities are pumping another 1 trillion won (S$1.15 billion) into Korean Air Lines Co, Yonhap News said.
The International Air Transport Association last month said the global airline industry's debt could swell by 28 per cent to US$550 billion this year, which includes US$123 billion in financial aid from governments.
The pandemic hit Cathay particularly hard because - like Singapore Airlines - it has no domestic market to fall back on, whereas carriers in China are rebuilding capacity on flights within the mainland. Passenger revenue is about 1 per cent of prior year levels, Cathay said. BLOOMBERG