When Cathay Pacific and its two largest shareholders suspended trading in their shares this week, Hong Kong’s business community held its breath.
Speculation was rife that Beijing-backed Air China was about to finally displace its partner in the airline, the colonial era conglomerate Swire Pacific, as Cathay’s largest shareholder.
But the deal, announced on Tuesday, was an anticlimax. Swire retained control as part of a HK$39bn ($5bn) Hong Kong government-led bailout package to rescue Cathay from the devastation of the coronavirus. Beijing may be eager to exert greater control over Hong Kong, last month introducing a contentious national security law for the territory. But Air China decided it had enough of its own pandemic-induced problems without also taking on the turmoil at Cathay, people close to the deal said.
“Taking [Cathay’s] liabilities on to its books was not something Air China was keen to do at this current juncture,” one of the people said. “The question does remain as to whether they will come in at a later point when the market is more stable and they have stabilised their own operations.”
Still, the people added, Air China maintained a long-term interest in prising Cathay from Swire, which would be heavily symbolic. Alongside Jardine Matheson and HSBC, Swire has been a dominant commercial force in Hong Kong since the territory was seized by the British in 1841. The former British colony reverted to Chinese sovereignty in 1997.
The rescue deal will also give the Hong Kong government, whose leader is handpicked by Beijing, unprecedented access to the inner workings of Cathay.
Markets have anticipated an Air China takeover of Cathay since 2006, when the pair agreed to a cross-shareholding structure that preserved Swire’s controlling stake in Cathay. Before the bailout, Swire held 45 per cent of Cathay and the mainland Chinese airline less than 30 per cent.
Cathay, one of the world’s best-known premium airlines, has been hit hard by the Covid-19 crisis. Unlike its competitors in mainland China and elsewhere, it has no domestic travel market to fall back on and until now has lacked government backing.
It has also suffered from months of disruption from Hong Kong’s pro-democracy protests. Cathay replaced its chief executive and its chairman resigned last year after coming under pressure from Beijing over the airline’s handling of staff who had allegedly participated in the demonstrations.
The airline first approached the Hong Kong government with the idea for the recapitalisation package at the end of March and discussions continued until the eleventh hour, according to one person with knowledge of the deal.
“The reality is that the recapitalisation plan announced today is basically the only plan available to Cathay Pacific,” Patrick Healy, Cathay’s chairman, said after the announcement. “The alternative would have been a collapse of the company.”
That dire scenario prompted the Hong Kong government’s first direct investment into a private sector company since its takeover of Overseas Trust Bank, which collapsed after a fraud in the mid-1980s.
The Hong Kong government will provide HK$27bn through a combination of share and warrant purchases and a bridge loan, leaving it with a 6 per cent stake in Cathay were it to exercise its rights in full. The government will receive two “observer seats” on Cathay’s board. In an attempt to allay concerns over government influence, the observers will be professionals rather than civil servants. But their opinions will be “listened to”, a company insider said.
Other shareholders will make up the difference via a rights issue, leaving Swire and Air China with slightly reduced stakes of 42 per cent and 28 per cent respectively.
Cathay will initially pay the Hong Kong government a 3 per cent annual dividend on its HK$19.5bn worth of preferential shares. Paul Chan, Hong Kong’s financial secretary, said on Tuesday the government did not plan to be a long-term shareholder in the company.
HSBC, BNP Paribas, Morgan Stanley and Bank of China advised on the bailout.
The airline has said it is burning through as much as HK$3bn a month. Martin Murray, chief financial officer, said the carrier went into the year with HK$20bn in cash on its balance sheet, which would last for six months without support from major shareholders.
In response, Cathay has cut passenger capacity by 97 per cent. “[We do] not anticipate that there will be a meaningful recovery for an extended period,” the airline said in a statement.
Air China also faces its own financial challenges, having booked a net loss of Rmb4.8bn ($680m) in the first quarter.
In an ominous reminder of what may yet await Cathay should Air China one day take control of the Hong Kong airline, Beijing’s flag carrier made a point of highlighting its allegiance to Chinese president and Communist party head Xi Jinping when it announced its first-quarter results. Cathay’s senior staff maintain strong connections with the UK.
“[Though] facing great difficulties,” Air China said, “the group firmly implemented the spirit of the important instructions of General Secretary Xi Jinping and resolutely carried out the decisions and arrangements of the Central Committee of the Party and the State Council.”