Cathay Pacific Airways announced yesterday that it will sell a HK$1.9 billion ($245 million) stake in Hong Kong Aircraft Engineering Company (Haeco) to Swire Pacific, its largest shareholder.
Cathay Pacific has agreed to sell 20 million shares, or a 12.45% shareholding, at HK$91.83 per share, which is a 1.6% discount to yesterday's closing price. The deal is part of an effort to bolster its cash holdings as fewer people travel due to the global economic downturn. Cathay Pacific's passenger yield fell 19.7% during the first half, owing largely to double-digit declines in premium traffic. Cargo traffic has also been falling.
On Tuesday, the International Air Transport Association (IATA) predicted that the industry will lose $11 billion this year, which is up $2 billion from a previous estimate. Asia-Pacific carriers are expected to be the worst off, with IATA forecasting a loss of $3.6 billion for regional carriers as they were hardest hit by fuel hedging losses. Indeed, Cathay Pacific took a HK$7.6 billion ($98 million) unrealised mark-to-market loss on fuel hedges in 2008 when the airline reported a record annual loss of HK$8.6 billion.
So the deal announced yesterday gives Hong Kong's flagship airline much needed cash. The airline is also cutting back in other ways -- such as giving staff unpaid leave and delaying a new cargo terminal.
"From a Cathay Pacific point of view, it will improve the airline's cash position during an extremely difficult time for the aviation industry," said Cathay Pacific chairman Christopher Pratt, who is also chairman of Swire Pacific and Heaco. "At the same time, the carrier will retain a strategic interest in Haeco."
The transaction will also enable Swire Pacific to make a significant increase in its strategic investment in Haeco, on terms it regards as appropriate. And it affirms Swire Pacific's
long-term commitment to Cathay Pacific and Haeco in particular, and to Hong Kong aviation in general, Pratt added.
In accordance with stock exchange listing rules, the transaction is subject to the approval of Cathay Pacific's independent shareholders. If approved, Cathay Pacific's direct interest in the issued share capital of Haeco will decrease from 27.45% to 15%, while Swire Pacific's stake in the maintenance provider will rise from 33.52% to 45.96%.
"Cash preservation has remained Cathay Pacific's top priority during this downturn and over the past year we have already taken many measures to help us achieve this goal," said Cathay Pacific chief executive Tony Tyler. "We will keep a strategic stake in Haeco, which is very important because Haeco is our main provider of overhaul and maintenance services, and Cathay Pacific is Haeco's biggest customer airline."
"The reality is the airline industry is facing an enormous challenge, and Cathay Pacific is not immune. Our ultimate aim has to be to preserve cash wherever possible, and it is imperative for us to review carefully and realistically all the options open to us," added Tyler.
Separately, Cathay Pacific confirmed that it has signed an agreement with the aircraft leasing company BOC Aviation for the sale and leaseback of six of the 19 Boeing 777-300ER aircraft the airline has on order. The aircraft are scheduled to be delivered between the fourth quarter of 2009 and the second quarter of 2011.
Commenting on the BOC Aviation deal, Tyler said in a press release: "This is a landmark
agreement because it is the largest single lease-back arrangement we have entered into. It is consistent with our cash-preservation priority during this difficult time, and dovetails with our long-term fleet management strategy to maintain an appropriate balance between owned and leased aircraft. Importantly, the arrangement will have no impact on our debt-to-equity ratio as there will be no need to raise finance for the purchase of these aircraft."
Tyler also reiterated that Cathay Pacific has no intention to cancel aircraft orders, but said the airline is in negotiation with aircraft manufacturers to defer some of its deliveries to align capacity with expected demand. "We believe this is a prudent step to take," Tyler said.
Cathay Pacific currently has 39 aircraft on order for delivery before 2013. At present, there are 122 aircraft in its fleet, 25 of which are leased. The remainder are owned by the airline.
Last month, Swire agreed to raise its stake in Cathay Pacific to 41.97% by buying HK$1 billion worth of shares in the airline from Citic Pacific. At the same time, Air China agreed to buy HK$6.3 billion of Cathay Pacific shares from Citic to increase its holdings in the airline to 29.99%.
Haeco's share price rose 0.4% to HK$93.30 in Hong Kong trading yesterday. Cathay Pacific's stock rose 4% to HK$12.36, and Swire gained 2.2% to HK$86.45.
