Here’s Why Cathay Pacific Shares Surged Nearly 20% Today

What happened

Cathay Pacific Airways Ltd (SEHK: 293), Hong Kong’s flagship airline, saw its shares open the trading day up around 18% on Wednesday.

However, its shares fell back after the initial pop and eventually ended the day down 1%. That underperformed the benchmark Hang Seng Index, which effectively finished the day flat – down around seven points.

So what

The surge in Cathay’s share price wasn’t exactly unwarranted. The airline, along with its key shareholders Swire Pacific Ltd (SEHK: 19) and Air China (SEHK: 753) had yesterday suspended trading of its shares pending an announcement.

What was later revealed wasn’t surprising. Cathay Pacific was being given a huge HK$39 billion (US$5 billion) bailout, led by the Hong Kong government.

The local government will extend HK$27.3 billion to the company in exchange for a 6.08% stake in Cathay.

The deal will be structured through the creation of a new government entity called “Aviation 2020” which will then buy HK$19.5 billion in preferential shares and have warrants worth HK$1.95 billion.

The airline also announced a HK$11.7 billion rights issue, which will see existing major shareholders Swire Pacific, Air China and Qatar Airways all subscribe to.

Besides these, Cathay will also be given a HK$7.8 billion bridging loan by the government-backed Aviation 2020.

Now what

There was clearly initial relief that Cathay would survive the fallout from Covid-19. The airline had done what it can – with pay cuts and an unpaid leave programme for its 25,000 employees.

However, the airline is still bleeding cash, losing around HK$2.5-3 billion per month. That can probably explain why its stock price fell back so quickly.

Like many airlines, it was no surprise that it went to the markets (and government) for a recapitalisation.

So what about the investment side of Cathay? With restrictions slowly being lifted, it’s still too early to say that Hong Kong’s airline can recover quickly.

What’s more, the airline was already dealing with the political fallout of last year’s anti-government protests. Back then, former CEO Rupert Hogg resigned in reaction to an uproar to the airline’s perceived support of the protests.

Add the cut-throat competition from mainland China carriers, and Cathay Pacific is an unappetising longer term investment.

That its existence is now guaranteed will be little consolation to shareholders, who have seen Cathay’s shares fall over 50% in the past five years and which are down around 25% so far in 2020.