Hong Kong’s $5 billion government-led rescue of its local carrier Cathay Pacific is the deal that nobody wanted, but no one could refuse.
On Tuesday the government said it would be stumping up most of the cash in an emergency bailout of the airline, which first flew from the city in 1946.
It is putting in the funds through a combination of preferred shares, warrants and loans, in what local media is reporting as the first instance in recent memory in which the government has injected money directly into a private company.
At first glance it doesn’t seem like much of a deal for taxpayers, who are committing more in capital than Cathay’s market value on the day before the deal, but getting just 6% of its shares. While the government will get two seats on the Cathay board, its representatives will attend as observers, without any voting rights.
That arrangement underlines the sense of how the government really doesn’t want to be involved at the airline. The deal on how the rescue package is to be paid back says something similar, with the financing costs increasing each year. That should motivate the airline’s management to reimburse the bailout as quickly as it can, officials hope.
The reality is that the government had little choice but to back Cathay financially. The alternative was the loss of thousands of jobs in tourism and aviation, as well as a disastrous dampening of trade and finance, the two biggest contributors to Hong Kong’s GDP.
Cathay’s failure would also have seen the city’s status as a leading aviation hub come under mortal threat from rival airports in nearby Shenzhen and Guangzhou, which would love to take chunks out of its passenger and cargo business.
Before the pandemic took hold Cathay was one of Asia’s largest international airlines and the fifth largest air cargo carrier globally. But in April it was carrying no more than 500 passengers a day across its entire network, only a few more than the seating capacity of a single Boeing 747.
While the Chinese carriers have resumed more flights in the mainland market over the last six weeks, Cathay’s operations in Hong Kong are still largely suspended, which added to the difficulties of finding other sources of emergency finance.
“Quite frankly, without this plan the alternative would have been a collapse of the company,” Cathay’s chairman Patrick Healy told reporters.
The deal has also been designed to maintain the delicate balance in Cathay’s ownership, which is shared primarily between Swire Pacific (and indirectly, its controlling investor, London-based John Swire and Sons) and Air China, China’s state-owned flagship carrier.
Qatar Airways, the Middle Eastern airline, is a smaller shareholder.
The very different backgrounds of the two main investors are a nod to how Cathay is an amalgam of Hong Kong’s past as a colonial entrepot and a future that’s much more dependent on demand from mainland China.
Swire would have struggled to meet a cash call of the size provided by the government. And although Air China could have raised the funds more easily, any increase in its stake in Cathay would have been politically awkward at a time when parts of Hong Kong’s population are furious about what they see as increased mainland Chinese influence.
In the meantime the emergency funding buys Cathay some breathing space to review its business. It now seems likely to shrink its fleet and network, perhaps dispensing with sub-brands such as Hong Kong Express. “The infusion of new capital does not mean we can relax. Indeed, quite the opposite. We must redouble our efforts to transform our business in order to be more competitive,” warned Healy.
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