Cathay Pacific’s Shareholders In Balance, But Qatar Airways Nudges

Asia was the first to experience the coronavirus downturn, yet its airlines are mostly late to receive major financial assistance.

Cathay Pacific may have a seemingly unlikely benefactor: another airline. Qatar Airways owns 10% of the Hong Kong carrier and is willing to invest further.

“If Cathay Pacific were to approach us for an equity injection, we will definitely support them,” Qatar CEO Akbar Al Baker told the SCMP.

Delta Air Lines
DAL
is not providing assistance to its equity members while airlines from Etihad to Singapore Airlines did not aid Virgin Australia, which is now in voluntary administration.

Cathay has not mentioned any equity changes. A spokesperson says, “We are not taking anything off the table.”

Less fortunate is Korean Air, whose Hanjin owner may have to raise $2.4 billion by parting with core businesses: loyalty program, catering and maintenance, according to the airline and financial industry.

Cathay and Korean Air are typical of Northeast Asia’s privately-owned airlines outside of mainland China. Asiana, Japan’s ANA and JAL, as well as EVA Air also do not have government ownership. (Taiwan’s China Airlines does have state backing.)

Comparisons to Southeast Asia are humbling.

Singapore Airlines, 55% state owned, received a S$5.3 billion ($3.7b) rights issue and bond raising of up to S$9.7b ($6.9b). This is the global “gold standard” airline aid package, Goldman Sachs
GSBD
MD Nicola Dondi told an Airline Economics webinar.

Qatar’s offer for Cathay seems favorable. But a rights issue raises strategic questions on top of Cathay’s complex ownership that has little manoeuvring without resulting in seismic changes.

Balance is critical.

If Air China’s 29.99% stake in Cathay reaches 30%, Air China is obliged to make a takeover offer based on Hong Kong listing rules. If Swire’s 45% stake increases by more than two points, it also has to make a takeover offer.

A coronavirus discount does not yet apply.

Like other airlines, Cathay’s stock price has decreased during the downturn – HK$8 ($1.03) in March and now about HK$9($1.16). But a takeover offer for a Hong Kong listed company cannot be less than the highest the stock has traded in the previous six months. Cathay stock was above HK$11 ($1.42) in January and HK$10 ($1.29) in February.

To further box in shareholders, a listed company in Hong Kong needs 25% free float. After Swire and Air China’s combined 74.9% holding, free float is 25.1%. Qatar’s holding counts as free float.

A company like Cathay with a market capitalization over HK$10b ($1.3b) can ask to lower its free float to 15%, but Cathay told investors in April it still follows the 25% threshold.

An Air China takeover of Cathay is favorite speculative past time for many. As mainland China emerges from coronavirus, it is balancing daily expenditure cuts with strategic acceleration. CAAC commentary is encouraging outside acquisitions alongside faster airport construction at home.

Using capital for an all-new investment might give greater benefits than incremental gains from growing an existing stake, like Air China’s holding in Cathay. Cathay is especially delicate given the political atmosphere and civil discontent in Hong Kong that is once again starting.

State-owned airlines often cannot move fast enough on foreign acquisitions. China Eastern’s Air France-KLM stake is an exception.

Qatar is also state-owned but acts quickly and boldly. It invited itself into Cathay, buying shares on the open market. Qatar has long sought to increase its Cathay stake.

Qatar’s airline stakes also help the gas-wealthy country invest overseas.

Cathay and Qatar are members of the oneworld alliance, but that has not produced a close relationship, unlike Qatar’s investment in British Airways and Iberia owner IAG, now at 25%.

Cathay and Qatar’s 2014 joint-venture was short-lived. Qatar does not have a board seat on Cathay. There is new complexity.

Qatar a year ago bought 5% of China Southern, the airline just over Hong Kong’s border that competes with Cathay for Greater Bay Area traffic.

China Southern is the largest airline in China – and Asia. It is an increasing concern for Cathay shareholder Air China. China Southern is growing in Shenzhen, home to Air China’s Shenzhen Airlines.

On Air China’s home turf in Beijing, China Southern will base over 200 aircraft at new airport Beijing Daxing. China Southern wants to link Daxing with the same blue-chip intercontinental destinations Air China has out of Beijing Capital airport.

Cathay has standing shareholder approval to issue shares and buy back shares. It will ask shareholders to renew the resolutions at its next annual general meeting, due sometime before June 30.

That will allow Cathay to buy back 10% of shares, and issue 20% of new shares although only 5% can be wholly for cash. A rights issue would require separate approval.

Qatar’s peer Etihad Airways injected capital while bypassing the shareholder registry at its airline investments. Etihad bought Jet Airways’ London Heathrow slots and took a stake in Air Berlin’s loyalty program.