Hong Kong government to bail out Cathay Pacific with HK$30 billion in loan and direct stake

• Restructuring package worth HK$40 billion to city’s flagship carrier, with Hong Kong government contributing lion’s share of bailout
• Government’s financial backing shows full support for city’s status as a regional aviation hub

Cathay Pacific will undergo a HK$40 billion (US$5.2 billion) capital restructuring exercise as the Hong Kong government takes the lead in a bailout package worth nearly HK$30 billion in loans and an undisclosed stake, lending its full backing for the city to remain the region’s aviation hub.It is the first time the government has directly injected money into a private company.

Hong Kong’s flag carrier will issue new shares as part of the plan which will see the authorities taking up two “observer” boardroom seats in an unprecedented shake-up that will empower it to have a direct say in how the airline is run, sources have told the Post.

Emerging as a “white knight”, the government will offer a loan to be paid back in the future and, more controversially, it will take a stake in the airline without seeking full boardroom status. Instead, it will have the “two observers” on the board, industry sources revealed.

Trading was suspended on Tuesday morning while the city’s leader, Carrie Lam Cheng Yuet-ngor, met with the Executive Council, her de facto cabinet, to get final approval of a package that is expected to be announced later on Tuesday.

Cathay Pacific is now majority-owned by the Swire Group with a 45 per cent stake, and Air China with 29.99 per cent. The restructuring is well above the airline’s market capitalisation which stands at HK$34.6 billion.

The International Air Transport Association said the industry supported some 330,000 jobs in the city.

Sources said the government decided to offer the rescue package given the importance of maintaining Hong Kong’s status as a regional aviation hub, and taking into account the hard-earned aviation rights, and important routes and flights, Cathay enjoyed and provided to residents and international passengers alike.

Cathay has control of approximately 50 per cent of runway slots at Hong Kong International Airport and has grown to become one of Asia’s biggest international airlines and the fifth largest air cargo carrier globally. It is now the only local airline to offer a full range of long-haul flights.

It has grown to operate 238 aircraft and carried 35.2 million passengers last year. Half of the airline’s HK$107 billion revenue last year came from Hong Kong and mainland China.

The two observers will not have voting rights on the board but would have a say on major decisions that affect the public’s interests. This could range from not allowing massive lay-offs at the airline, which employs 33,000 staff, to ensuring company values would be in line with the city administration’s own emphasis on the “one country, two systems” principle of governance.

At the height of the political unrest last year, Cathay had become embroiled in controversy as employees found themselves in a number of high-profile protest-related incidents.

The airline came under intense scrutiny from China’s civil aviation authority and sweeping changes followed soon after among top management, including the resignations of CEO Rupert Hogg and his deputy Paul Loo Kar-pui, and later the retirement of long-time chairman John Slosar.

Sources told the Post Cathay had tried to secure loans from the private equity market but could not get bidders, given the political sensitivities surrounding its ownership.The coronavirus pandemic has forced airlines across the world to boost their cash position or seek government bailouts to survive the crippling collapse in air travel.Cathay Pacific lost HK$4.5 billion in the first four months of 2020 through the pandemic, and on March 11 it had HK$20 billion in unrestricted liquidity going into the Covid-19 crisis.

To date, Cathay Pacific has offered little guidance about its funding needs, but described the financial outlook as “very bleak” in mid-May.

Other governments have lined up to come to the aid of ailing airlines in recent months.

Notably, Lufthansa Group is set to get US$12.3 billion from the governments of its national airlines in Germany, Switzerland, Belgium and Austria, which includes US$9.8 billion from Berlin.

The German government will get a 20 per cent stake and two boardroom seats filled by independent experts. Lufthansa has to give up some runway slots and fly more environmentally friendly as part of the deal.

US carriers have also benefitted from a US$50 billion bailout, while other airlines in the region have filed for bankruptcy including Latam, South America’s biggest carrier.