The Hong Kong government has offered Cathay Pacific a HK$27.3 billion (US$3.52 billion) lifeline to prevent it from falling into the hands of mainland or foreign players, Financial Secretary Paul Chan said.
The number of the airline’s international flights has dropped by 90% over the past few months due to the Covid-19 pandemic, creating a very “scary” situation for the aviation sector, Chan said on Tuesday.
If Cathay goes bankrupt or is acquired by mainland or foreign airlines, Hong Kong would lose its freedom of the air, Chan said.
Chan said the bailout is not simply financial support to Cathay but will help lower the systemic risk in Hong Kong’s aviation sector. He said the government will not assign an official to the board of Cathay but will appoint two observers who have legal, accounting and business knowledge to monitor the airline’s businesses.
He said the bailout will be funded by the government’s land fund, which has an outstanding balance of HK$220 billion.
Currently, about 40% of the land fund has been allocated to the investment portfolio of the city’s Exchange Fund. At the end of last year, the total assets of the Exchange Fund increased 5% to HK$4,259.1 billion from HK$4,054.9 billion at the end of 2018.
Cathay chairman Patrick Healy said the company is burning HK$2.5 billion to HK$3 billion per month despite cost-cutting measures which include no pay leave and the delays on new aircraft delivery.
Healy said the airline will collapse after spending all of its HK$20 billion reserves if it does not have a restructuring plan, which involves the HK$27.3 billion from the government and another HK$11.7 billion from a rights issue.
Healy said the bailout is the only option for Cathay to survive. He said the government will not take part in the airline’s operations and will exit from its investment at the right time in future.
“Tough decisions will need to be made in the fourth quarter of this year to get Cathay to the right size and shape in which to compete successfully and thrive in this new environment,” Healy said.
The pandemic led to a 64.4% drop in Cathay Pacific Group’s passengers in the first four months of this year compared with the same period of last year. The airline reported an audited loss of HK$4.5 billion during the period. It has grounded almost its entire fleet.
On Tuesday, Cathay announced a recapitalization proposal worth HK$3.9 billion. The government will lend HK$7.8 billion to the company and buy its special shares worth HK$19.5 billion.
The airline is also raising HK$11.7 billion from existing shareholders in a rights issue. For every 11 Cathay shares, shareholders are required to buy seven rights shares at a subscription price of HK$4.68 each. Cathay shares closed at HK$8.81 on Monday.
The airline’s major investors, Swire Pacific, Air China and Qatar Airways have agreed to top up their holdings.
On June 2, the government extended the 14-day home quarantine requirements for people arriving from places other than the mainland, Macau and Taiwan, which were to expire on June 18, to September 18. It means that Cathay faces a harsh business environment for at least several more months.
Jeremy Tam, a Civic Party lawmaker and a former Cathay pilot, said the government should ensure that Cathay will not cut its staff after the bailout. Many employees have volunteered to take unpaid leave to help the struggling company, he said.
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