The Hong Kong government’s HK$29 billion (US$3.8 billion) bailout of Cathay Pacific gives needed cash without major shareholder Air China taking over the airline in a move neither carrier or government seems prepared for in the current sensitive political and financial environment.
“The government’s investment signifies our determination in reinforcing our international aviation hub status,” Financial Secretary Paul Chan said. The support will “enable the much needed post-COVID-19 revival of the economy.”
Hong Kong had been an exception to major governments giving large loans or grants to airlines in the wake of the coronavirus crisis. Cathay was gradually being encircled by competitors, within Asia and further flung, with fresh cash to steer them through aviation’s worst downturn.
Cathay’s HK$39 billion (US$5 billion) recapitalisation is mostly in the form of new equity and is led by the Hong Kong government. Its future ownership structure will not significantly change as the Hong Kong government gains a 6.1% stake.
Cathay Pacific ownership after recapitalisation
“It is not the intention of the government to hold this investment long-term,” Chan said. “It is not our intention to become a long-term shareholder of Cathay Pacific.”
Existing shareholders retain balance but with marginal dilution after the rights issue. “The existing shareholders need to contribute funding to the group,” Chan said.
Swire Pacific’s holding in Cathay will decrease from 45% to 42.3%, Air China from 29.9% to 28.2%, and Qatar Airways from 9.9% to 9.4%. Swire and Air China combined will still own over 70%.
Swire, whose trading flag and name is on every Cathay Pacific aircraft, has been less enchanted with the airline. Competition depressed earnings, political risk became high, and patriarch Sir Adrian Swire passed away, replaced by scion Merlin Swire, who is less interested in airlines.
tail-fin, horizontal-stabiliser, rear door and windows of the fuselage of a Cathay Pacific Airways … [+]
Air China and the Chinese government are not the open bank account they are commonly perceived as. Coronavirus has put pressure on every industry. Air China’s short-term debt grew 75% from $3 billion to $5.2 billion in the first quarter during the virus outbreak.
Hong Kong and Cathay may pale in importance as Air China contends with unprecedented new competition in its home of Beijing. New airport Beijing Daxing has relieved capacity constraints, allowing rivals China Eastern EML and China Southern to grow. Air China is losing its near monopoly on international flights from Beijing.
BEIJING, CHINA – JUNE 03: People walk at Beijing Daxing International Airport on June 3, 2020 in … [+]
The Hong Kong government will buy new Cathay shares and have warrants amounting to HK$21.5 billion (US$2.8 billion), and will also provide a HK$7.8 billion (US$1 billion) loan.
The preference shares have step-up rates earning 3% more after three years and up to 9% after five years. The shares – at HK$100 (US$12.90) – are priced at a premium. Cathay shares have not exceeded HK$15 (US$1.94) in almost five years. The rights issue is priced at HK$4.68 (US$0.60), a 47% discount from Monday’s closing price.
The city will not have voting members on Cathay’s board but will have two observer seats. Qatar Airways, which will have a larger stake than the Hong Kong government, has not had a board representative.
There are over-blown fears the Hong Kong government’s stake and observer seats equate to political influence to keep Cathay in line. Mainland China’s aviation regulator CAAC already warned the airline after staff were involved in last year’s Hong Kong protests. Breaches could see Cathay banned from flying into or over mainland China, which would almost cripple its operation.
Senior management at Cathay are seconded from Swire, which is also under pressure after the protests. At stake is Swire’s extensive business network in mainland China from soft drinks to real estate, all more profitable than Cathay.
Cathay Pacific celebrates the arrival of its first A350 aircraft. 30MAY16 SCMP/Edward Wong (Photo by … [+]
Cathay’s benchmark rival Singapore Airlines still outshines on receiving government support. Both Cathay and Singapore Airlines, with no domestic markets of their own, are totally exposed to international competition.
Singapore Airlines raised S$8.8 billion (US$6.3 billion) in new equity subscribed by majority owner Temasek, a state-owned investment vehicle. That was the “gold standard” for airlines, Goldman Sachs GSBD said.
Hong Kong in April offered its airlines a paltry HK$1 million (US$129,000) grant per aircraft, amounting to around US$30 million for Cathay. The city’s wage support scheme was less generous than in Singapore, the U.S. or Europe.
Cathay Pacific aircrafts line up on the tarmac at the Hong Kong International Airport, Friday, March … [+]
The government’s initial low support for airlines contrasts to lawmakers debating a HK$5.4 billion (US$700 million) bailout for local amusement attraction Ocean Park.
Growing anxiety in Hong Kong about its future with mainland China is symbolically represented by Air China possibly taking over Cathay, a default rumour any time Cathay had news lined up in recent years.
Cathay long expected Air China, which initially invested in 2006, would one day increase its shareholding past the 30% mark that would trigger a mandatory takeover offer.
From left to right, China National Aviation Company Ltd. Chairman Kong Dong, Air China Ltd. Chairman … [+]
Updated on June 9 with further details.
I have been covering airlines and aerospace in Asia-Pacific for 10 years. I am particularly interested in aeropolitics, cross-border investments, partnerships,
I have been covering airlines and aerospace in Asia-Pacific for 10 years. I am particularly interested in aeropolitics, cross-border investments, partnerships, transformations, new revenue growth and start-ups. I am originally from New York City, graduated from the University of Melbourne, and now live in Hong Kong.