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Law360 (June 9, 2020, 7:21 PM EDT) -- Airline Cathay Pacific said Tuesday it will be receiving over $3.5 billion in funding from the government of Hong Kong as it deals with the COVID-19 pandemic and the political unrest in the Chinese territory and readies for "tough decisions" on the company's future.
Hong Kong-based Cathay said in an announcement on its website that the Hong Kong Special Administrative Region will be extending the company a 7.8 billion Hong Kong dollar bridge loan ($1 billion) and will purchase HK$19.5 billion ($2.5 billion) in preference shares as part of a three-part, HK$39 billion recapitalization in order to help the company survive a 99% drop in passenger revenue from last year.
"We are in a very dynamic situation. We need to make the right decisions to adapt to the new reality of global aviation and secure our long-term future," Cathay board chairman Patrick Healy said in the announcement.
Founded in Hong Kong in 1946, Cathay as of 2019 owned 155 aircraft and flew to 79 locations worldwide.
In its 2019 annual report, the company posted HK$1.7 billion in profits. This was down nearly 28% from the previous year, and the report said passenger traffic to Hong Kong had been depressed in the second half of the year by the protests against the Chinese government that began last June and that cargo revenue had been down due to trade tensions between China and the U.S.
Tuesday's announcement said the passenger decline caused by the protests has been exacerbated by the COVID-19 pandemic. While the pandemic has caused a severe drop in air travel worldwide and sent a number of airlines into bankruptcy, Cathay said it has been hit particularly hard because all its flights are international.
"That travel remains highly restricted and subject to quarantine constraints, with no prospects for a return to normal international travel arrangements anytime soon," it said.
The announcement said the company has responded by placing 80% of its employees on voluntary leave, reducing passenger capacity by 97% by cutting back to three flights a week to 15 destinations, implementing executive pay cuts and deferring new aircraft purchases.
"Despite all these measures, the collapse in passenger revenue to only around 1% of prior year levels has meant that we have been losing cash at a rate of approximately HK$2.5 billion to HK$3 billion per month since February, and the future remains highly uncertain," Healy said.
According to the announcement, the recapitalization will take place in three tranches, the two government tranches and the issuing of HK$11.7 billion in new stock to current shareholders, with the stock issues subject to shareholder approval.
Healy said even with the new funding the company cannot "relax," noting the International Air Transport Association has predicted international air travel demand will not return to pre-COVID levels before 2023. He said the company has instituted a new round of leaves and executive pay cuts, and that management is putting together a recommendation for the company's "optimum size and shape."
"Tough decisions will need to be made in the fourth quarter of this year to get Cathay Pacific to the right size and shape in which to compete successfully and thrive in this new environment," Healy said.
--Editing by Michael Watanabe.
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