Hong Kong is contributing $ 5 billion to Cathay Pacific

Cathay and parent company Swire Pacific have announced they will raise Hong Kong $ 39 billion ($ 5 billion) in new capital on Tuesday so the airline can survive the crisis caused by the coronavirus pandemic.

The Hong Kong government would secure the bulk of the new funds by extending a guarantee package worth $ 27.3 billion ($ 3.5 billion) consisting of loans and preferred stock purchases. The rest of the capital will come from the issuance of new shares.

The contract would leave Aviation 2020, a Hong Kong-owned limited liability company with a stake of approximately 6% in Cathay. The government will also appoint two observers to Cathay’s board to protect its investment, City Finance Minister Paul Chan told reporters.

The airline is “grateful” for state capital support that allows Cathay Pacific to maintain our operations and continue to contribute to Hong Kong’s international air hub status, “Patrick Healy, Cathay’s president, told reporters Tuesday.

“Without this plan, the alternative would be the collapse of the company,” he said.

The main carrier leader in Hong Kong has already suffered a business downturn widespread protests which rocked the city last year, when it was hit by a coronavirus pandemic.

As elsewhere, business and annual trips to the Asian financial hub have stalled. Healy said on Tuesday that Cathay’s passenger revenue had plummeted to about 1% of normal levels. The carrier has reduced executors ’salaries, awakened staff and operated 3% of its cash-saving capacity. On Tuesday, he announced a reduction in executive salary costs of up to 30%.

The global aviation industry has been crippled by the coronavirus ferment, which has led governments elsewhere to deal with large airlines. Germany leads Lufthansa in the amount of 10 billion dollars. Meanwhile, the total value of state bailouts for U.S. airlines, reached $ 50 billion.

Cathay has burned more than $ 3 billion ($ 387 million) a month since February, retreating quickly to the $ 20 billion ($ 2.6 billion) cash heap he had at the beginning of the year.

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The airline is now re-evaluating all aspects of its business model, “and inevitably this will include streamlining future planned capacities compared to our pre-crisis plans,” Healy said.

Cathay said he was unlikely to return to the number of flights he had flown before the pandemic.

Swire Pacific (SWRAY), one of Hong Kong ‘s richest family business empires, said in a statement that it supports the restructuring plan. The cash injection will sustain Cathay’s “competitiveness and business despite unprecedented challenges in the global travel market,” the company said.
Once the deal is done, Swire will reduce its stake in Cathay from 45% to about 42.3%. Other major shareholders Air China (AIRYY) and Qatar Airways will also be left with slightly smaller stakes in Cathay of around 28% and 9%, respectively.
The Hong Kong government has a keen interest in maintaining the city’s aviation center. More than 74 million passengers traveled to and from the airport in 2018. Prior to Covid-19, it operated 1,100 passenger and cargo flights daily and served about 200 destinations worldwide, directly and indirectly contributing 5% of Hong Kong’s GDP.

“Hong Kong is a city, compared to the US or China, once we don’t have international flights, Hong Kong will stop,” Chan told reporters.

Both Cathay and Hong Kong officials have said the government does not intend to remain a shareholder in the long run.

Dividend payments for preferred government stocks are designed to encourage Cathay to pay out and repurchase shares as soon as possible, Healy said.

Governments have pledged $ 123 billion in financial aid to airlines around the world, according to a May report by the International Air Transport Association. Most of the aid consists of loans, loan guarantees and deferred taxes that will need to be repaid, the aviation group said.

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