The Hong Kong government has made an agreement with flagship carrier Cathay Pacific to lead a $5 billion bailout of the airline in exchange of a minority stake.
As part of plans announced by Cathay and parent company Swire Pacific to raise 39 billion Hong Kong dollars or $5 billion, the airline will receive a bailout package worth 27.3 billion Hong Kong dollars or $3.5 billion consisting of loans and preferred share purchases.
Cathay will try be raising the remaining funds by issuing new stock. Under the deal, Aviation 2020, a limited company owned by Hong Kong's government, will receive a stake of approximately 6% in Cathay.
The move to raise new capital is aimed at helping the flagship carrier survive the effects of the .
Cathay Chairman Patrick Healy said Cathay is "grateful" for the government's "capital support, which allows Cathay Pacific to maintain our operations and continue to contribute to Hong Kong's international aviation hub status."
Challenges prior to the pandemic
Even prior to the onset of the global coronavirus pandemic, Hong Kong's flagship carrier has already been suffering a slowdown in business due to the widespread protests that has been going on in the city for several months.
In December, Cathay announced that it would reduce its capacity in 2020 as the protests in Hong Kong continue. According to Cathay, its inbound traffic to Hong Kong fell by 46% in November compared to last year.
Its Cathay Dragon subsidiary, which handles regional flights, also posted 9% less passengers in November than they did a year prior. The decrease in passenger traffic was in its fourth straight month during that time.
Ronald Lam, chief customer and commercial officer for Cathay Pacific, said the airline has decided to reduce seat capacity by 1.4% in 2020, reversing its original plan of expanding capacity by 3.1%. He pointed out that this is the “first time in a long while” that Cathay will reduce its size.
Current situation
With business and holiday travel at a complete halt to and from Hong Kong, Cathay's passenger revenue has fallen to about 1% of normal levels. As a result, the airline has reduced executive pay, furloughed employees and has been operating at 3% capacity to preserve cash.
The company admitted that it is unlikely to return any time soon to the same number of flights it was operating prior to the pandemic. Healy said that Cathay is doing a re-evaluation of all aspects of its business model, and "inevitably this will involve rationalization of future planned capacity compared to our pre-crisis plans."
Parent company Swire Pacific expressed support towards the restructuring plan and said that the cash injection will maintain Cathay's "competitiveness and operations amidst the unprecedented challenges to the global travel market".
The proposed deal will reduce Swire’s stake from 45% to about 42.3% while other major shareholders Air China (AIRYY) and Qatar Airways will be left with slightly smaller stakes of about 28% and 9%, respectively.
In a statement, Cathay said: "Cathay Pacific has explored available options and believes that a recapitalization is required to ensure it has sufficient liquidity to weather this current crisis.”
In March, the airline sold six Boeing 777-300ER jets and associated equipment for over $700 million.
