Hong Kong Government Bails Out Cathay Pacific With $5 Billion

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The government of Hong Kong has agreed to bailout Cathy Pacific to the tune of $5 billion by taking a minority stake in the hard-hit airline. Cathay Pacific and its parent company Swire Pacific announced today that they plan to raise 39 billion Hong Kong dollars ($5 billion) in new capital.

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Cathay Pacific has been operating at 1% of its normal capacity. Photo: Getty Images

This new injection of cash comes as the former British colony’s most significant airline struggles to operate during the current coronavirus pandemic. The Hong Kong government will provide the troubled airline with 27.3 billion Hong Kong dollars ($3.5 billion) in the form of loans and preferred share purchases.

The rest of the money will come from new stock being issued by the airline. When the deal is complete, Aviation 2020, a limited company owned by the Hong Kong government will own around 6% of Cathay Pacific.

In a statement released by Cathay Pacific, Chairman Patrick Healy said,

“We are grateful to the HKSAR Government’s capital support, which allows Cathay Pacific to maintain our operations and continue to contribute to Hong Kong’s international aviation hub status. We are also grateful to our shareholders for their confidence in the long-term future of Cathay Pacific and in the ability of Cathay Pacific’s management team to lead our airlines through what is the most challenging period in the Group’s history.”

Cathay Pacific was struggling before COVID-19

Even before the COVID-19 crisis came about Hong Kong’s flagship carrier has suffered a slump in passenger numbers due to widespread political protests. Now with the coronavirus having brought international aviation to a virtual standstill, Healy said that Cathay’s revenue from passenger traffic had dropped to around 1% of what it used to be.

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Cathay Pacific was hurt by last year’s anti-government protests. Photo: Studio Incendo via Flickr.

To help combat the slide in demand and hold onto cash, Cathay has furloughed staff, cut management pay, and is operating at 3% of its capacity. The airline is re-evaluating all aspects of its business model while saying it is unlikely to return to the same number of flights it had before the coronavirus.

“inevitably this will involve rationalization of future planned capacity compared to our pre-crisis plans,” Healy said.

The restructuring plan will help Cathay to compete with other airlines

In its statement, Cathay Pacific said that it supports the restructuring plan and will help the Hong Kong carrier to compete with other airlines.

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The Hong Kong government will end up owning around 6% of Cathay Pacific. Photo: Getty

When the financing is put in place, Swire Pacific will be left with a 42.3% stake while other shareholders Air China and Qatar Airways will see their stakes drop to around 28% and 9%, respectively.

When speaking about the deal with reporters, Hong Kong Financial Secretary Paul Chan said that the government was not interested in holding a long-term stake in the airline.

Airlines around the world are seeking government aid

Cathay Pacific is not alone in turning to the government for help with nearly every airline worldwide seeking state aid to remain in business. In the majority of bailout packages, the assistance has come in the form of deferred taxes, loans, and loan guarantees. All of these measures must, at some point, be repaid by the airlines.

What do you think about the Cathay Pacific bailout? Please let us know your thoughts in the comments.

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