Cathay Pacific (CX) has announced it will receive a US$5.03bn (HK$39bn) in recapitalization financing by the Government of Hong Kong in exchange for a minority stake in the company.
The bailout package means an extension of the previously delivered US$3.5bn in the form of loans, share purchases, and new funds from issuing new stock as a plan for the carrier to stay afloat amid the current crisis,
The capital restructuring will imply government participation in the company with a 6% stake through the limited company Aviation 2020, of which it is the owner.
Further, the governmental entity will have two observers in CX’s board, according to Hong Kong finance secretary, Paul Chan.
On its part, the airline’s Chairman, Patrick Healy said that this help was “absolutely necessary” to the survival of the company as it was “close to collapse.”
Healy also said that the injection would mean a redoubling of efforts by CX to be more competitive. Thus, the chairman announced a new round of cash-saving actions in the form of pay cuts and voluntary leaves.
STAKES IN THE COMPANY
According to CX’s filing with the Hong Kong Stock Exchange (HKEX), the restructuring process includes preference shares worth HK$19.5bn.
Additionally, the deal covers rights issues at HK$11.7bn alongside a bridge loan worth HK$7.8bn, and warrants to subscribe for shares totaling HK$1.95bn.
While travel restrictions reduced inbound and outbound passenger traffic for the Cathay Pacific Group, other companies with stakes in the airline will see their participation diminished with this bailout deal.
Swire Pacific, Air China (CA), and Qatar Airways (QR) will have now 42.3%, 28%, and 9% in stakes, respectively, reported CNN.
However, the Hong Kong executive does not expect to stay as a shareholder in the long term as its dividend payments are planned to stimulate CX as soon as possible, according to carrier and city officials.
Swire is the largest shareholder of Cathay Pacific Group, with a 45% stake.
CATHAY PACIFIC’S FINANCIAL SITUATION
According to its Chairman, CX has a collapse in passenger revenue to 1% from normal levels, which caused a loss from HK$2.5bn to HK$3bn per month since February.
In this scenario, passenger capacity was cut by 97% while executive pay cuts and a voluntary leave scheme affecting 80% of staff were implemented. Additionally, the company deferred aircraft orders and accelerated fleet retirements.
Apart from what the carrier calls being “agile in responding to this unprecedented crisis,” with this capital injection, its focus now remains on cash conservation.
Regarding this, CX argued that the company’s recapitalization would require more liquidity; thus, it will also slash executive pay by 30% and implement voluntary special leaves for its employees.
Healy expects that with these measures and the recapitalization financing, the airline could now re-evaluate its business model in the long term and grow in a better competitive position than its current one.