Cathay Pacific may have won some breathing space after shareholders signed off on its HK$39 billion (US$5 billion) rescue plan but investors only need to look at its peer Singapore Airlines to know that more pain is in store.
More than 99 per cent of independent shareholders who voted on Monday supported Cathay Pacific’s HK$11.7 billion cash call. A HK$27.3 billion bailout by the Hong Kong government was also approved, handing it a critical lifeline.
Yet, a third wave of coronavirus infection in the city is holding back any show of relief. Hong Kong recorded more than 200 new local cases since July 5, pressuring the carrier’s already weak sub-10 per cent capacity run. Level France this week decided to cease operations, saying passenger demand will not return to 2019 levels until 2023 at the earliest, according to various media reports.
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“The third wave would prolong its expected path to recovery,” said Kenny Tang, chief executive at Royston Securities. “Initially, there was an expectation that there could be some sort of travel bubble to help reboot its passenger traffic. Now, Cathay Pacific can only play a passive role on when it could actually turn the corner.”
Cathay Pacific’s stock has slumped 21 per cent since unveiling its June 9 recapitalisation plan, a reminder of the industry’s continued struggle. Global passenger load factor reached a new record-low for the month of May, while the recent increase in Covid-19 cases has weakened bookings, according to the International Air Transport Association, an industry guild.
Based on Monday’s closing price of HK$6.94, near a 19-year low, the stock could adjust to HK$6.06 when they trade without rights entitlements from Wednesday, according to its recapitalisation timetable.
That is still some margin above the HK$4.68 rights subscription price, should Cathay Pacific’s 15 per cent of minority investors want to take up their rights. If they decide to sell their entitlements and forego their rights due to the third wave of coronavirus cases in Hong Kong, Morgan Stanley, BOC International, HSBC and BNP Paribas have agreed to underwrite any rights issue shortfall.
The HK$4.68 subscription price, was set at a 35 per cent discount to the theoretical ex-rights price (TERP) level, calculated at HK$7.20. Typically, the price of a stock adjusts lower after a rights issue, as the number of shares outstanding is enlarged. But Cathay Pacific’s tumble below the TERP illustrates the cloudy outlook for airlines.
Shares of Singapore Airlines have lost 13 per cent even after completing its own US$11.5 billion recapitalisation programme on June 5, including a S$8.3 billion contribution in rights subscriptions and bailout by state investment arm Temasek Holdings. It also posted its first ever annual loss in the year to March 31.
The Lion City’s flag carrier has already used up S$2 billion to repay loans from DBS Group Holdings, while renewing its precious credit lines and fattening its cash hoard with new loans and aircraft leases.
Much of the same financial juggling can be expected from Cathay Pacific to stretch its HK$39 billion survival kitty. At the end of 2019, it had HK$20.7 billion of loans coming due in 2020. More job rationalisation has been hinted in a memo sent by general manager of aircrew Alex McGowan to the company’s 4,100 cockpit crew in May.
“They will need to have more cost control as cash flow will be under big pressure,” said Kelvin Lau, head of auto, transport and industrial research at Daiwa Capital Markets. “The one-time support from the government will help but can they survive next year? Practically, there seems to be a need for ongoing support.”
Chief executive Augustus Tang Kin-wing has promised to deliver an “optimum” plan in the fourth quarter to keep the carrier lean. He may replay his recorded video message to staffers in February, when the pandemic was in full swing.
“I am appealing to each and every one of you to help,” he said then. “Preserving our cash is now key to protecting our business.”
Additional reporting by Danny Lee
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This article Cathay Pacific’s rights issue less appealing after stock slump and third wave of coronavirus infections first appeared on South China Morning Post