Airline Weekly

Hong Kong Loan Extension Illustrates Cathay Pacific’s Troubles

The Hong Kong government has given Cathay Pacific another year to draw down a HK$7.8 billion ($1 billion) loan, in a sign that the carrier’s business remains tenuous even as other airlines in the region are planning to wean themselves off state aid.

The loan is part of the HK$39 billion in state aid the Hong Kong government extended to Cathay Pacific at the onset of the pandemic, in June 2020. The extension runs through June 9, 2023. The airline said it has not had to draw on the loan for the last 12 months but added the extension gives it “the flexibility to manage our liquidity position.” Cathay Pacific ended 2021 with HK$30 billion in liquidity.

The carrier said it is planning to increase capacity, which will have a “positive impact on the airline’s business.” Still, it expects to burn HK$500 million per month in the near term.

“The unprecedented impact of the pandemic has necessitated some very difficult decisions, namely our restructuring in 2020, but through this and our recapitalization, we have created a more efficient, more competitive and more focused business,” Cathay Pacific CEO Augustus Tang said in a statement. “We have already recommenced hiring as we plan for the anticipated recovery in Hong Kong and global aviation in the 18-24 month period ahead.”

Despite Tang’s optimism, the present is pretty grim for Hong Kong’s flag carrier. In its most recent traffic report, Cathay Pacific said April traffic was down 98.5 percent from three years earlier. Capacity in April was down 97.7 percent from 2019. Compared with last year, traffic in the first four months of 2021 was up 16 percent while capacity was down 60 percent. Even cargo traffic — a lifeline for the struggling carrier during the pandemic — was down 43 percent in the first four months compared with last year.

That the Hong Kong government is extending state aid is remarkable, as airlines around the world have begun repaying the government aid they received earlier in the pandemic. Support for U.S. carriers, for example, expired in September last year, and many European airlines have repaid or begun repaying government loans first extended in 2020, a report from the Organization for Economic Cooperation and Development shows.

The city-state is grappling with a fifth wave of Covid, with hospitalizations and test positivity rates among the highest of any period during the pandemic. And Hong Kong continues to impose mandatory 7-day quarantines for permanent residents and 14-day quarantines on foreign nationals, regardless of vaccination status. This is as countries like Malaysia, Singapore, South Korea, and Thailand have relaxed their restrictions on inbound travelers, and as Japan prepares to do so. Hong Kong’s restrictions, however, are in line with those of mainland China, which has locked down several major cities in recent weeks in an attempt to contain Covid-19. The continued quarantine requirements imperil Hong Kong’s position as a global connecting hub, IATA has warned.

At the outset of the pandemic, analysts said airlines with small or no domestic markets — airlines like Copa, Emirates, KLM, and Singapore Airlines, to name a few — would struggle, while those based in countries with large domestic markets would benefit. In broad strokes, this was true for most the period from April 2020 to now. Airlines in Brazil, Canada, Mexico, and the U.S. began to bounce back as restrictions eased. Airlines in China and Russia also succeeded earlier in the pandemic, until the most recent Omicron subvariant wave ran into China’s strict “zero Covid” policy and Russian airlines began to feel the effects of Western sanctions over the the country’s invasion of Ukraine.

But as travel began to open up, even airlines based in smaller countries began to rebound. Copa, after spending much of 2020 grounded, returned to profitability by leveraging its Panama City hub to connect North and South America. Emirates has continued to report losses and availed itself of an additional $954 million in state aid last year, but its traffic improved by almost 200 percent in the fiscal year that ended in March from the year prior. The Dubai-based airline also is hiring to replace employees that left during the pandemic.

And KLM CEO Pieter Elbers recently told Airline Weekly the pandemic underscored the importance of a strong hub to maintain global connectivity when the number of flights plummeted. “There were certain specific city pairs where the only connection was through Amsterdam — for many city pairs we were the only airline, the only window to the world,” he said.

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