Cathay Posts Record $2.8 Billion Loss in Toughest Year Ever

by BLOOMBERG

Cathay Pacific Airways Ltd. reported a net loss of HK$21.65 billion ($2.8 billion) for 2020, a period the carrier described as “the most challenging 12 months of its more than 70-year history” as the coronavirus pandemic brought unprecedented disruption to global air travel.

The outlook isn’t much better, according to the airline’s Chairman Patrick Healy, who said in a statement “it is by no means clear how the pandemic and its impact will develop.” Hong Kong has largely closed its borders to non-residents and imposed 21-day mandatory quarantine on those who return. Cathay expects to operate at well below 50% passenger capacity in 2021.

Cathay’s shares slid as much as 1.7% when trading resumed Wednesday afternoon following the results.

The company said it will persist with cash preservation measures, which include maintaining executive pay cuts through this year. And it has asked employees to sign up for another “special leave program” in the first half of 2021, to which 80% have agreed. Previous programs have involved staff taking three weeks of unpaid leave over a designated period.

Cathay raised HK$39 billion in a recapitalization in July, and its available unrestricted liquidity stood at HK$28.6 billion at the end of 2020. It also issued HK$6.74 billion in convertible bonds this year to secure more funds.

Tough 2020

Last year started fairly promisingly for Cathay with a slight pickup in traffic after a tough second half of 2019, when anti-government protests rocked Hong Kong and hit the city’s visitor numbers. But the carrier’s position worsened drastically with the onset of Covid-19 in Wuhan in late January.

At that point, on Jan. 22, Cathay took the unusual step of issuing a press release with the first sentence all in bold:

“Due to the evolving information from health authorities, we will allow crew members and front-line airport employees to wear surgical face masks when on duty at their discretion,” it said.

Strange as it might seem now that masks are ubiquitous, the policy was well ahead of its time — and an omen of the chaos about to hit global air travel. A day later, regional unit Cathay Dragon suspended flights to and from Wuhan for a month. On Jan. 26, the suspension was pushed to the end of March, and then matters snowballed as the pandemic took hold, ripping travel plans and the aviation industry apart.

The extent of the damage from 2020 on Hong Kong’s flag carrier was revealed shortly after midday on noon Wednesday. The airline had already warned the numbers wouldn’t be pretty following a first-half loss of HK$9.87 billion. For the July-December period the loss was even bigger, at HK$11.8 billion.

The loss was net HK$2.7 billion of Covid-related government grants. It included impairment and related charges of HK$4.1 billion on 34 aircraft unlikely to reenter meaningful service again before being retired or returned to lessors, as well as subsidiaries’ assets and HK$4.0 billion of restructuring costs, including a HK$1.6 billion write-off of a deferred tax asset at Cathay Dragon.

Even after a recapitalization in July and cost-reductions through layoffs, pay cuts and a skeleton flight schedule, Cathay is still burning through HK$1.5 billion or more a month and its share price sank 29% in 2020. Passenger traffic has slumped 99% from pre-pandemic levels.

Cathay’s shares have slowed their decline this year, falling just 1% through Wednesday morning.

Cathay said it reached an agreement with Airbus SE to defer delivery of A350-900s and A350-1000s from to 2020-23, and A321neos to 2020-25. The airline is also in advanced negotiations with Boeing Co. on the deferral of 777-9 deliveries.

Cathay took delivery of 10 new aircraft in 2020, including its first A321neo, and partially converted four Boeing 777-300ER passenger aircraft to provide additional cargo-carrying capacity. The company is transferring certain aircraft from Cathay Dragon to Cathay and low-cost unit HK Express.

Andrew Lee, an analyst at Jefferies, said he expects Cathay to remain loss-making until travel and quarantine restrictions ease and international travel returns, noting that 82 of the carrier’s planes are parked in locations outside Hong Kong.

“However, we maintain Buy with our HK$8.00 PT as we estimate CX is close to the bottom given January passenger traffic was already -99% lower y-y,” Lee wrote in a note.

The downbeat 2020 results followed the pattern of monthly reports last year as the pandemic showed no signs of easing up.

“Our passenger business continues to face significant challenges,” Chief Customer and Commercial Officer Ronald Lam said in a statement on Cathay’s December traffic figures. One optimistic note came in an October release amid plans to open a travel corridor with Singapore, which Lam described as “a hugely encouraging development.” That was soon snuffed out though as the plan was shelved due to a virus flareup in Hong Kong.

How Cathay Saw the Crisis Unfolding:

  • Jan. 28: Cathay Pacific and Cathay Dragon will be progressively reducing the capacity of our flights to and from mainland China by 50% or more from Jan. 30 to the end of March.
  • Feb. 17: Our performance deteriorated rapidly in the last week of January as the coronavirus situation became more severe. We saw significant cancellation of bookings within a short period.
  • March 16: The challenge we are currently facing is unprecedented.
  • April 16: Passenger demand dropped rapidly and tremendously in late March following the introduction of arrival restrictions on all non-resident visitors to Hong Kong, including transit passengers.
  • May 15: This is the biggest challenge to aviation we have ever witnessed.
  • Aug. 14: In addition to the Covid-19 pandemic, we have to contend with a looming global recession and geopolitical tensions.
  • Sept. 14: We are weathering the storm for now, but the fact remains that we simply will not survive unless we adapt our airlines for the new travel market.
  • Oct. 19: We expect we will be operating approximately 10% of our pre-pandemic passenger flight capacity for the rest of 2020 and under 50% for overall 2021.
  • Nov. 5: Executive pay cuts will continue throughout 2021 and a third voluntary special leave scheme for non-flying employees will be introduced. There will be no salary increases for 2021.
  • Dec. 16: We are still not seeing any meaningful improvement in our passenger business.
  • March 10: The correlation between the roll-out of vaccination programmes in our key markets and the potential future relaxation of travel restrictions remains highly uncertain and difficult to predict.

The pandemic came on top of a difficult 2019, when Cathay was affected by the political unrest in Hong Kong that at some points spread to the airport, paralyzing operations there. The upheaval also contributed to a change in senior management, with Augustus Tang taking over as chief executive officer and Healy becoming chairman.

This year hasn’t started much better. While vaccines are rolling out globally and there’s talk the worst of the pandemic may be over, Hong Kong is still largely shut down to international travel due to mandatory 21-day quarantine requirements for returning residents. Non-residents from outside mainland China, Macau and Taiwan aren’t allowed to enter the city. A recent law requiring flight crew to quarantine has added to Cathay’s woes — and a further HK$300 million to HK$400 million to its monthly cash drain.

At its lowest points last year, Cathay flew just a few hundred passengers a day. On Dec. 28, over the typically busy Christmas period, the airline, its vast international network in tatters, carried just 490 travelers.

Since the onset of the pandemic, Cathay’s passenger revenues declined to only 2%-3% of 2019 levels, the company said Wednesday.