Hong Kong Government Flies to the Rescue - Cathay Pacific’s HK$40bn Bailout
Managing Director, Aviation Industry Group
Natixis Asia Pacific
The fallout from the Covid-19 global pandemic has hit the aviation sector particularly hard. With approximately 80% of aircraft grounded globally and a total expected cost to the industry of US$400bn, it will be many years before the aviation market gets back on its feet.
The initial brunt of the Covid-19 impact landed squarely on the shoulders of the airlines as revenues effectively ceased following the closure of national borders and dramatic fall in passenger numbers.
Nowhere was this impact felt more acutely than at Cathay Pacific, the national flag carrier of Hong Kong. Cathay Pacific was particularly vulnerable heading into the pandemic, following a significant downturn in its business from the Hong Kong protests in 2019 and a public spat with the Chinese Government, which resulted in CEO, Rupert Hogg, stepping down in August the same year.
At the outset of the pandemic, Cathay Pacific undertook a number of cost-cutting measures to ease the financial pressure on the airline. These included, reducing flight schedules by 97%, implementing a three-week unpaid leave program for staff, deferring capex on new aircraft and shutting hubs in US and Canada. However, these measures were still not enough to negate the devastating impact of Covid-19, with the company announcing a HK$4.5bn loss in the first four months of 2020.
" While Cathay Pacific is not completely out of the woods yet, the strong support from the Hong Kong Government has ensured the ongoing survival of the airline for the foreseeable future (...)"
With its financial future looking bleak Cathay Pacific turned to the Hong Kong Government for assistance to ensure its survival.
Fortunately for Cathay Pacific, aviation is a critical sector for Hong Kong, driving both the tourism industry as well as a thriving air-cargo industry, which is worth US$473bn or approximately 40% of Hong Kong’s total trade.
As such, the Hong Kong Government took the unprecedented step of providing a significant rescue package which included taking a direct equity stake in the business. The total rescue package of HK$39bn, which is supported by the three major shareholders of Cathay Pacific; Swire Pacific, Air China and Qatar Airways, consists of the following:
HK$19.5bn preference shares with detachable warrants issued to the Hong Kong Government
HK$11.7bn rights issue (of which each of the three major shareholders above have committed to subscribe for their full allocation)
HK$7.8bn bridge loan provided by the Hong Kong Government
The deal is a fantastic result for shareholders. The Hong Kong Government provided almost HK$30bn of rescue funding, including the subscription for warrants and in return will have just a 6% stake in Cathay Pacific.
As a result of this structure, Swire Pacific and Air China will maintain their joint control position while the Hong Kong Government will be allocated two non-voting Board Observers until such time as the preference shares and bridge loan are repaid.
While Cathay Pacific is not completely out of the woods yet, the strong support from the Hong Kong Government has ensured the ongoing survival of the airline for the foreseeable future and cements Hong Kong’s reputation as a strategic global aviation hub within the broader aviation industry.