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Breakingviews - Hong Kong tacks on Cathay to complicated itinerary

A Cathay Pacific Boeing 777-300ER plane lands at Hong Kong, China August 14, 2019.

HONG KONG (Reuters Breakingviews) - Hong Kong just complicated a busy itinerary by adding Cathay Pacific to it. The government is leading a HK$39 billion ($5 billion) bailout of the struggling carrier, leaving it with a 6% stake. Swire Pacific also vowed to keep control as part of an accompanying rights issue. That will ease some concerns about a takeover by shareholder Air China, but it’s still a dicey deal amid the city’s unrest.

Cathay was roiled by months of anti-government demonstrations in its home base, which deterred visitors months before the pandemic started grounding planes. A backlash from Beijing over employees joining the demonstrations led to the departure of the company’s chief executive last year. In May, Cathay said it lost HK$4.5 billion ($581 million) at its full-service airlines from January to April and warned of a bleak outlook. The shares are now trading at less than half their 2010 peak.

The hard times theoretically increased the chances of a seizure by Air China, the state-backed carrier that owns just under 30% of Cathay. That uncomfortable possibility has been put off for a while, with parent Swire Pacific, which holds a 45% stake, saying it would remain the controlling shareholder for as long as Hong Kong has any of its $2.5 billion of preference shares or $1 billion bridge loan in place. Swire Pacific and Air China, along with Qatar Airways, also said on Tuesday they would take up their full complement of the HK$11.7 billion rights issue, priced at a 47% discount to the last closing price.

That all gives Cathay some breathing room, but presents yet another entanglement for Hong Kong Chief Executive Carrie Lam. The airline was already carrying more than $10 billion of debt at the end of last year and has been losing over $320 million in cash a month since February. It will be 2023 at the earliest before worldwide passenger demand returns to pre-crisis levels, the International Air Transport Association trade group forecasts. That makes the bailout look risky, especially given the inequality undercurrents driving the protests, which have prompted Beijing to implement a controversial new security law in Hong Kong. The use of funds may not sit well with many residents of a city already enduring a harsh recession.

Breakingviews

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