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Cathay Pacific defers aircraft deliveries, offers more financial guidance
July 24th 2020
Cathay Pacific Group this week said it would defer aircraft deliveries and flagged an operating loss in the vicinity of HK$8.7 billion (US$1.1 billion) for the first half of calendar 2020 due to the collapse in passenger traffic from the coronavirus pandemic. Read More »
The estimated operating loss for the six months to June 30, 2020 was included in the company's prospectus lodged this week with the Stock Exchange of Hong Kong for an upcoming rights issue. It represented a dramatic turnaround from an operating profit of HK$2.5 billion in the prior corresponding half.
Revenue is forecast to have tumbled by 48%, to HK$27.7 billion, from HK$53.5 billion previously.
"Travel restrictions imposed by various governments have led to significantly reduced inbound and outbound passenger traffic for the Cathay Pacific Group and uncertainty over the Cathay Pacific Group’s future prospects and operations," the company said in the prospectus.
"Cathay Pacific is particularly impacted by such travel restrictions as it has no domestic network. It is wholly reliant on cross-border travel, which remains highly restricted and subject to quarantine constraints, with no prospects for a return to normal international travel arrangements any time soon."
The forecast operating loss comes a week after the company guided the market to a likely first half net loss of HK$9.9 billion, compared with a net profit of HK$1.3 billion a year ago.
Passenger numbers declined 76% in the first half of 2020 and capacity was cut by 65.7%. Demand, or revenue passenger kilometres (RPK), slumped 72.6%.
In response to market conditions, the Cathay Group has parked scores of aircraft and operated a skeleton schedule to reduce costs and preserve cash. Staff had been stood down and executives taken pay cuts.
The prospectus also outlined an agreement with Airbus to defer delivery of A350-900s and A350-1000s due to arrive in 2020 and 2021 to the 2020-2023 time period. A321neos, scheduled to join the group’s fleet in 2020-2023, would be delayed to 2020-2025.
The company said advanced negotiations with Boeing for the deferral of 777-9X deliveries were "ongoing".
The deferral of deliveries was "expected to produce cash savings to the Cathay Pacific Group in the short to medium term", the prospectus said.
Cathay Pacific's 2019 annual results showed that at December 31, 2019 the airline group had outstanding firm orders for 12 A350 family aircraft. Of those, four A350-900s and three A350-1000s were due to be delivered in calendar 2020 and another five A350-1000s were to arrive at the airline group in calendar 2021.
The delivery profile for 16 A321neo for regional wing, Cathay Dragon, was six aircraft in 2020, eight in 2021 and two in 2022.
The group fleet profile showed 16 A321neos were to be operated by the recently acquired low-cost carrier (LCC), HK Express, from 2022. More immediately, the LCC was due to receive four A320neos in 2020 and one of the type in 2021.
The airline group had 21 777-9X wide-bodies on order, with six due to arrive at the carrier in 2021 and 15 in 2022.
Cathay Pacific Airways, Cathay Dragon, HK Express and freight operator, Air Hong Kong, operated a combined 236 aircraft at December 31, 2019.
Whether the airline group would need that number of aircraft in a post-coronavirus pandemic market was being considered by management as part of a review of the business, the company said.
Conclusions about the optimum size and shape of the company were expected to be decided before the end of 2020, with a smaller operation the forecast outcome.
"Inevitably this will involve rationalisation of future planned capacity compared with pre-crisis plans, taking into account the market outlook and cost structure at that time," it said.
The prospectus was for a HK$39 billion capital raising announced in June to bolster the balance sheet and offer a cushion for depleting cash reserves.
Cathay said its operating cash burn had been reduced from HK$2.5 billion to HK$3.0 billion per month at the start of the COVID-19 pandemic to about HK$1.5 billion per month currently.
In terms of its balance sheet, Cathay said at June 30 it had long-term liabilities of HK$76.5 billion while short-term loans and the current portion of long-term liabilities was HK$23.9 billion.
It held liquid funds worth HK$7.4 billion and undrawn committed facilities of HK$8.2 billion.
As part of the capital raising, the Hong Kong Special Administrative Region government was joining the share register and would have two non-voting observer seats on the board. Major shareholders Air China, Swire Pacific and Qatar Airways also were fully participating in the rights issue.
The prospectus said the board would continue to explore opportunities to improve Cathay's capital structure.
"If suitable market conditions arise, Cathay Pacific may further access the equity and debt capital markets to strengthen its balance sheet," the prospectus said.
Written by Jordan Chong
