(June 9): Cathay Pacific Airways Ltd. became the latest global carrier to seek a lifeline in the aftermath of Covid-19 travel restrictions, outlining a plan to raise HK$39 billion (US$5 billion or S$7.0 billion) from the Hong Kong government and shareholders after months of warnings about the frailty of its business.
See: Hong Kong to lead Cathay Pacific's HK$40 bil bailout package : SCMP
The rights issue proposal, reported earlier Tuesday by Bloomberg News, is on the basis of seven rights shares for every 11 existing shares held and would raise about HK$11.7 billion, Cathay said in a statement to the Hong Kong stock exchange Tuesday. The preference shares will be sold to the government for HK$19.5 billion along with HK$1.95 billion of warrants, subject to adjustment.
Aviation 2020 Ltd., a Hong Kong government-connected entity, is extending a HK$7.8 billion bridge loan. The government will own 6.08% of Cathay through Aviation 2020 after the deal.
“Cathay Pacific has explored available options and believes that a recapitalisation is required to ensure it has sufficient liquidity to weather this current crisis,” the airline said in the statement.
Carriers around the world have been searching for funds after the coronavirus wiped out passenger demand and grounded fleets. Governments have devoted more than $85 billion to propping up airlines, including the major U.S. carriers and Germany’s Deutsche Lufthansa AG, which secured about $10 billion in state support. Even so, global air traffic may only get back to 50% to 60% of usual levels by year-end.
Cathay and main shareholders Swire Pacific Ltd. and Air China Ltd. suspended trading Tuesday, pending the announcement. Hong Kong Financial Secretary Paul Chan will hold a news conference at 3 p.m. Hong Kong time on the investment “to uphold Hong Kong’s status as an international hub,” the government said. Cathay plans a press conference at 4 p.m.
See: Cathay, Swire Pacific, Air China halt trading in Hong Kong
Cathay and Swire Pacific applied to resume trading Wednesday. Shares are expected to fall, said Kelvin Lau, an analyst at Daiwa Capital Markets Hong Kong Ltd.
“The rights issue will have a dilution effect and that’s going to be reflected in share prices when trading resumes,” Lau said.
Cathay also will implement another round of executive pay cuts and a second voluntary leave program for employees. The airline is losing cash at a rate of as much as HK$3 billion a month since February.
“In the longer term, all aspects of the Cathay Pacific Group’s business model will be re-evaluated,” the company said.
Cathay isn’t alone in seeking help. In Asia, Singapore Airlines Ltd. raised S$8.8 billion ($6.3 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 ($834 million) into Korean Air Lines Co., Yonhap News said.
American Airlines Group Inc., Delta Air Lines Inc. and United Airlines Holdings Inc. are among those to have lined up billions of dollars in U.S. federal aid to help them through the crisis. Avianca Holdings SA and Latam Airlines Group SA have filed for bankruptcy, while administrators are looking at bidders for Virgin Australia Holdings Ltd. after it collapsed in April.
The International Air Transport Association last month said the global airline industry’s debt could swell by 28% to $550 billion this year, which includes $123 billion in financial aid from governments. The industry group expects airlines to burn through about $60 billion of cash in the second quarter alone.
The pandemic has 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% of prior year levels, Cathay said.
“These funds, along with other efforts like selling some of their planes and possible job cuts, could help tide them over for about 2 years,” said Shukor Yusof, founder of aviation consulting firm Endau Analytics in Malaysia. “But the long-term view of Cathay remains uncertain.”
Even before the pandemic, Cathay was under enormous financial and political strains as it found itself caught up in the Hong Kong anti-government protests, which affected traffic numbers and led to the exit of the company’s former chief executive officer. Cathay was criticized by China, protesters and its own workers for its response to the demonstrations.
Air China has owned about 30% of Cathay for more than a decade, while Swire, one of the last remaining British trading companies based in Hong Kong, has a 45% stake. Qatar Airways has a 9.99% holding.
Cathay and its Cathay Dragon unit posted an unaudited net loss of HK$4.5 billion ($581 million) in the first four months of the year as their route network shrank to just 14 destinations. In April, the two carriers combined flew only 458 passengers a day, on average, and Cathay warned that international travel demand will take a few years to recover. Cathay also owns Hong Kong Express, a budget carrier that has grounded its fleet since March.
More than 25,000 Cathay staff agreed to take part in an unpaid leave program announced in February that required employees take three weeks off between March 1 and June 30. The acceptance rate was lower for crew and pilots, the most expensive employees, a person familiar with the plans said at the time. Cathay posted an unaudited loss of more than HK$2 billion in February alone.
Hong Kong has reported a total of 1,107 confirmed coronavirus cases and four deaths, according to Johns Hopkins University data. Globally, infections have reached more than 7.1 million with more than 400,000 deaths.
