HONG KONG (AP) — Financially battered Hong Kong airline Cathay Pacific Airways has become the latest airline to resort to government support to survive the coronavirus pandemic.
The Hong Kong government on Tuesday approved a 39 billion Hong Kong dollar ($5 billion) recapitalization plan that calls for a new government-controlled entity called Aviation 2020 to buy $2.6 billion of an up to 33 billion Hong Kong dollars ($4.3 billion) share offering by Cathay Pacific.
The airline also would receive a 7.8 billion Hong Kong dollar ($1 billion) loan from Aviation 2020.
Cathay Pacific proposed the bailout as it struggles to survive the near collapse of regional travel due to the pandemic.
“The objective is to help protect Hong Kong’s role as a leading international aviation hub in this region, as well as the long term, overall economic development of Hong Kong, while generating a reasonable return for the government,” Hong Kong financial secretary Paul Chan told reporters.
Chan said that the government had no intention of becoming a long-term shareholder in Cathay Pacific, and would not interfere in the operations and management of the airline. If it exercises its rights to the shares it will hold up to a 6% stake in the airline.
The government stands to earn a return of about 4% to 7% from the investment, compared to an average 3.7% return for the portfolio of Hong Kong's sovereign wealth fund, the Exchange Fund, he said.
“We hope that during these difficult times that this can help (Cathay Pacific) recover, and when they do so, they can pay off the loans and buy back the preferred shares,” said Chan, adding that defending Hong Kong’s flight routes was crucial for maintaining the city's status as a aviation hub.
Cathay Pacific, one of Asia's biggest airlines, was founded in 1946 by two former Air Force pilots to help transport goods from Australia to China. It has been hamstrung by the recent collapse of regional travel on top of a decline in traffic to Hong Kong following months of anti-government protests.
The airline has grounded most of its flights as travel remains restricted across much of the region.
“Cathay Pacific has explored available options and believes that a recapitalization is required to ensure it has sufficient liquidity to weather this current crisis,” the airline said in the filing.
Cathay Pacific's current largest shareholder, Swire Pacific, issued a statement saying it “fully supports" the recapitalization plan.
Swire, a conglomerate descended from a trading house set up in Liverpool in 1816, holds a 45% stake in Cathay Pacific. Air China, China's state-owned flag carrier has a 30% stake and Qatar Airways holds 10%.
All three are committed to subscribing to an 11.7 billion Hong Kong dollar ($1.5 billion) rights issue as part of the bailout package.
Cathay Pacific said it plans executive pay cuts and a second voluntary leave scheme for employees on top of earlier cost-cutting measures.
In the first four months of the year, the number of passengers carried by Cathay Pacific plunged nearly 65% amid a halving of capacity. The airline has been operating a skeletal network of flights to major destinations such as Singapore, Beijing, Los Angeles, New York and Tokyo.
Cargo measured by weight fell nearly 27% in the first four months, against about a 25% decrease in capacity, the airline said.
Chan pointed out that Hong Kong, unlike the U.S. and mainland China, lacks a domestic aviation market.
“If we don’t have international flights, then everything comes to a grinding halt,” he said.
Cathay Pacific and Cathay Dragon, the group's two main carriers, reported a combined 4.5 billion Hong Kong dollar ($580 million) unaudited loss in the first four months of 2020.
As an airline partially owned by a state-owned carrier with much of its business in mainland China, Hong Kong's political upheavals have weighed heavily on Cathay Pacific.
Last year, the airline's CEO Rupert Hogg resigned under pressure after some of Cathay Pacific's employees were found to have joined the protests.
More than a dozen airlines worldwide have sought government relief either in the form of bailouts or special loans to cope with the fallout from the pandemic.
Some airlines, such as Latam Airlines Group and British carrier Flybe, have stopped flying altogether, while others, like Thai Airways and Virgin Australia, are reorganizing under bankruptcy protection.