Cathay Pacific Game-changing Recapitalization
Recapitalization programme is a game-changer for Cathay Pacific
See the related interview on Bloomberg TV
The first half of the interview: https://www.bloomberg.com/news/videos/2020-07-14/cathay-pacific-shareholders-approve-plan-to-avoid-collapse-video
The entire interview begins at three 32:25: https://www.bloomberg.com/news/videos/2020-07-14/bloomberg-markets-china-open-full-show-07-14-2020-video
Cathay Pacific held an extraordinary AGM on 13 July 2020 to vote on a $5 Billion (39 billion Hong Kong dollars) support package. Details of the support package, or bailout, are well documented and includes a combination of new share capital, warrants and loans.
Most significant is to note that the Hong Kong Government’s support includes share capital which results in the Hong Kong Government acquiring 6.1% of shares in the company, marginally diluting all other shareholders.
Swire Pacific: 45% reduced to 42.3%
Air China: 29.9% reduced to 28.2%
Qatar Airways: 9.9% reduced to 9.4%
Hong Kong Government (New): 6.1%
Other shareholders: 15% reduced to 14.1%
Many aviation and financial analysts and consultants have commented positively on the recapitalization while at the same time criticizing it.
However, we at Aviado Partners, unequivocally believe this is game-changer for Cathay Pacific.
For far too long, Hong Kong has supported Cathay Pacific, while concurrently allowing relatively unrestricted competition. This is evidenced by the permitting of the relatively unsustainable growth of HNA Group subsidiaries Hong Kong Airlines and HK Express. The growth of those two airlines blocked valuable slots at Hong Kong International Airport that would allow Cathay to achieve its full potential and compete effectively with other major Asian hub carriers, such as Singapore Airlines Group and the Middle Eastern ‘super-connectors’.
We are hopeful that a shareholding by the HK government will result in a new paradigm.
Government investment forms the foundation for a positive relationship between the airline and regulators to allow it to compete well
The Cathay business model
We believe that Cathay’s commitment to the full service business model was absolutely the right way to go and Cathay did very well even in the face of strong LCC competition. It’s a simply matter of understanding market segments better than their competitors who all feared that no frills airlines are equally attractive to all passengers, which simply does not hold true.
However, the Cathay business model struggled in the face of unregulated, uncontrolled, irrational and unsustainable competition from Hainan, Hong Kong Airlines and HK Express, combined with shifting passenger demand from China-AU passengers (a topic which must be reviewed in it’s own merit separately).
A restructuring has been underway at Cathay for a few years, with mixed, but unsustainable results. Cathay also acquired HK Express, therefore acquiring a much needed narrowbody fleet and slots at HKIA. Singapore Airlines faced many of the same market challenges and even more competition at its home hub where Emirates has established its own network. However, unlike Cathay, Singapore pivoted its network very quickly to align better to changed demand flows, supported by six Star Alliance partners in Europe.
The way forward
Cathay Pacific must urgently reorganize its business, but it cannot continue with the restructuring in the manner it has been for the past few years. That very traditional approach, employed by most big four accounting firms and consultancies, has been proved, time and time again, to be mostly ineffective in yielding sustainable profitability.
We would bet on Cathay’s success. But not if it continues the restructuring the way it has been for the past few years.
A more practical, robust and commercially driven restructuring is needed which aligns all parts of the business to optimize commercial potential of the airline.
The goal must be to weather this storm and position for a sustainable restart in mid-2021 with scaling up in 2022 and achieving a steady state on the scale of 70-75% of Cathay’s pre-covid-19 size, albeit with a different balance in fleet and network.