The Hong Kong government’s rescue of Cathay Pacific is a win for both sides, sending a reassuring signal to the markets about the future of the airline and the city’s aviation sector during the Covid-19 pandemic, but the move does raise some uncertainties going forward, experts say.
With the decision, the government joins others around the world that have stepped up with funding for troubled flag carriers, but it marks the first time authorities in the proudly free-market city have directly intervened in the fate of a private company.
“Cathay has received possibly the biggest vote of confidence from the Hong Kong government during the most challenging year in its history,” said Luya You, transport analyst at brokerage Bocom International. “It’s a big signal to the rest of the market that Hong Kong considers Cathay integral to the city’s future growth and economic health.”
The rescue package removed most doubt as to whether Cathay could last out the health crisis, she said.
Under the deal, the government will pump HK$27.3 billion (US$3.52 billion) into the airline as part of a larger HK$39 billion recapitalisation effort, in exchange for 6.08 per cent of shares. The government said it viewed its stake as a medium-term holding to keep for three to five years.
“It’s a rare [intervention] by the Hong Kong government, as a promoter of the free market,” said Lei Zheng, founder and president of the Institute of Aviation Research in Melbourne, Australia. “For a regional financial hub, a strong aviation industry is very important, just as New York and London are also aviation hubs” supplementing their roles as financial centres, he said. “The move will also enhance the confidence of the entire aviation industry in Hong Kong.”
Since the pandemic erupted, governments around the world are estimated to have provided US$123 billion in life support in the form of loans, guarantees, wage subsidies and other assistance, according to the International Air Transport Association (IATA). The global body on Tuesday forecast the industry would suffer a US$84 billion loss this year and take a further US$15 billion hit next year.
Singapore Airlines similarly tapped the support of the city state’s Temasek investment fund as part of a US$13 billion cash-call in March. In Germany, the Lufthansa Group ceded a 20 per cent stake to the government and two board seats in return for a US$9.8 billion stake.
Not all airlines are surviving the economic maelstrom. Flybe, a British regional outfit that once carried up to 8 million passengers a year, and Latam, the largest Latin American transport group, filed for bankruptcy following a collapse in earnings.
Alexandre de Juniac, IATA’s director general and CEO, said the substantive help from the city’s government was a win for both sides.
“It is a clear recognition that the airline industry is key for Hong Kong to develop the economy, to maintain the international role and economic key place of Hong Kong. This recognition has led the Hong Kong government to provide Cathay Pacific with a significant package to recover,” he said.
Under the deal, the airline will receive immediate access to a government bridging loan worth HK$7.8 billion, while the government will seek HK$19.5 billion in preferential shares, which come with restricted voting rights, and warrants for as much as HK$1.95 billion in shares later. The government would only take the 6.08 per cent stake if the warrants were fully exercised.
According to Bocom’s You, Cathay decided the structure of the package and set the terms for preferential shares, which allowed it to raise financing without adding debt. The move would allow the airline to tap capital markets for fresh funding without incurring a high debt-to-equity ratio, leaving the company more attractive to future lenders, she said.
Terence Chong Tai-leung, an associate professor of economics at Chinese University, said he believed the government’s investment was a relatively fair deal but worried it could contribute to a monopoly by the airline.
“Cathay has been running a poor business due to fuel hedging loss, and its mother company, Swire Properties, should be able to assist it, rather than seeking the government’s rescue,” he said. “Now with the government’s input, although Cathay has a strategic role in the aviation sector, it might on the other hand help to strengthen its monopolistic role.”
But Chong was optimistic on the deal overall, saying most bond investments in the Exchange Fund were currently failing to return a profit. A change of investment tactics might be a good move. He predicted that with the new capital and assistance, Cathay’s stock price and cash flow would improve.
The rescue did raise concerns over the political implications of the deal.
The airline last year said staff members who backed anti-government protesters would not be allowed to fly to mainland China. But the Hong Kong government insisted it had no ulterior motive.
“The bailout was intended to maintain the city’s status as a major international aviation hub,” said finance chief Paul Chan Mo-po. “We do not have other thoughts, and I would say there’s too much speculation if you believe the decision is political-related.”
The government made clear it did not want to interfere in the company’s management or its day-to-day operations. As with any prudent shareholder, its two seats on the board are to ensure its investment would be value-for-money for taxpayers.
For Cathay, the hard work starts now. The company begins the task of restructuring, re-evaluating its business model, size and shape of the business, although executives offered few immediate details.
“The infusion of new capital does not mean we can relax. Indeed, quite the opposite. We must redouble our efforts to transform our business in order to be more competitive,” chairman Patrick Healy said.
Additional reporting by Lilian Cheng and Iris Ouyang
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