Cathay Avoids Collapse With $5 Billion Government-Backed Plan

(Bloomberg) -- 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 ($5 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 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% 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 recapitalization 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 $85 billion to propping up the industry, 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.

“With the participation of the Hong Kong government in its capital reorganization, 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 Wednesday. Air China owns about 30% of Cathay, while Swire Pacific has a 45% stake. Qatar Airways holds 9.99%. All three have undertaken to vote in favor of all resolutions for the recapitalization 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 billion to HK$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,” 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% 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.

The acceptance rate was lower for crew and pilots, the most expensive employees, a person familiar with the plans said at the time.

Healy and Chief Executive Officer Augustus Tang will take a 30% pay cut, and other executives as much as 25%. 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 2 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. 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.

Others such as Avianca Holdings SA and Latam Airlines Group SA 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 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.

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.

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.

Cathay and its Cathay Dragon unit posted an unaudited net loss of HK$4.5 billion 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.

©2020 Bloomberg L.P.