Cathay Pacific Interview | The CEO still burns more than 1.5 billion dollars a month, says 3 ways to solve the difficulties and does not rule out refinancing

Financial News

Written by: Kwong Yueting

2020-09-28 06:00

Last update date: 2020-09-28 06:00

The global aviation industry has suffered from the impact of the new crown pneumonia epidemic. With the implementation of immigration controls by countries around the world, passenger demand has dropped to near zero.

Airlines suddenly lost their main source of income and all adopted various measures to "rescue the nation," from layoffs to launching "destined" flights.

Cathay Pacific Airways (0293), which recently announced that it will not apply for the second round of "employment protection", has caused speculation about its layoffs.

Rumors are flying everywhere. Cathay Pacific CEO Deng Jianrong gave an interview last Friday (25th) and reiterated that he is still studying the future direction of Cathay Pacific and will not exclude any options at this stage.

Facing the biggest challenge in the history of the group, the new helmsman, who took over in August last year, said frankly that he must reverse the current monthly "burning" of more than 1.5 billion yuan, so he does not rule out any further throttling and financing actions. We will do all the measures that can be done, and it is impossible to maintain the current situation for a long time. (Otherwise) a group will be destroyed, and it will have a great impact on Hong Kong."

The global aviation industry is in a cold winter. Cathay Pacific announced earlier that its subsidiaries Cathay Pacific and Cathay Dragon would not apply for the second phase of the government’s "Employment Guarantee" program. This immediately triggered speculation on whether Cathay Pacific’s move would pave the way for layoffs and how many employees would be affected. .

As the two airlines employ nearly 20,000 employees, once a large-scale layoff is announced, it will attract widespread attention from the society.

Deng Jianrong personally explained during the interview, indicating that the company will consider all factors before making a decision. At this stage, it is still studying the scale and model of Cathay Pacific's future operations. Therefore, any options will not be eliminated, nor will it comment on rumors about layoffs in the market.

Cathay Pacific currently has an average daily passenger capacity of only 1,500 passengers, which is very different from the previous approximately 100,000 passengers.

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The future development focuses on three major directions

The epidemic is volatile, and the aviation industry has not been able to accelerate the pace of "rebuilding" passenger business.

Deng Jianrong revealed that Cathay Pacific passenger transport revenue accounts for about 75% of the overall revenue, but the current average daily passenger capacity is only 1,500, which is quite different from the previous approximately 100,000.

He does not deny that Cathay Pacific is facing the biggest challenge in history, even though the company has taken a lot of cost-cutting measures since the beginning of this year, including cutting all non-essential expenditures, letting management cut salaries, letting employees take unpaid leave, and demanding supplies. Providers offer discounts, deferred payments, postponement of aircraft delivery, etc., but they still record a net cash outflow of 1.5 billion to 2 billion yuan every month. "No company can outflow like this every month."

He has not been able to "stop the bleeding" for a long time. In addition to the sharp drop in income, Deng Jianrong also explained that the biggest expense of airlines is the cost of owning the aircraft, including the mortgage loan and aircraft rental for purchasing the aircraft. Other expenses include fuel costs, Labor costs, maintenance costs, catering costs, etc.

Due to the decline in the number of Cathay Pacific flights, fuel and other costs have been greatly reduced, but the manpower expenditure is relatively fixed, "No matter how much you fly, there is a cost loudness."

In August this year, Cathay Pacific, with government support, completed a capital restructuring plan of up to 39 billion yuan, leaving some breathing room for this airline with a net debt ratio of 1.88 times. The management will determine the most suitable future for the group in the fourth quarter of this year. The scale and mode of operation, and recommendations to the board of directors, the outside world will have a little more control over the prospects of Cathay Pacific.

Deng Jianrong did not disclose the deadline for submitting the proposal. He only stated that the company's future development will focus on three major directions, including greatly improving the company's cost-effectiveness, providing more competitive services to customers, and optimizing in response to the new travel normal Routes and adjustment of capacity.

After being asked about the huge capital restructuring, will Cathay Pacific make any further financing actions?

Deng Jianrong responded that "it can't be ruled out." "I always talked about sitting down and eating landslides, my income has been drastically reduced, and the net cash outflow every month is large. It is unsustainable. After the capital reorganization, it is necessary to repay the money (to the government) and also For interest payments, the annual interest rate is 3%, and then increased to 7%, 9%, there is a pressure loudness. If the situation is bad, you will have to raise funds again, but don’t know when you will do it.”

Deng Jianrong bluntly said that "Sit on the landslide", Cathay Pacific's current monthly net cash outflow is unsustainable.

(Photo by Gong Jiasheng)

Happy to see tourism bubbles and hope that the authorities will make appropriate arrangements according to local risks

Indeed, the failure of the reorganization depends on the development of the epidemic in addition to Cathay Pacific’s own efforts.

Deng Jianrong admitted that only when effective vaccines are available and most of the world’s population has been vaccinated, can everyone travel with peace of mind, but I believe it will take a relatively long time to do so, and it is too late for the industry. "When the vaccine is available, we Resuming flights and communication with people will have a great impact on people's lives."

The International Air Transport Association (IATA) expects that the demand for international passenger transport will not return to the pre-crisis level until 2024 at the earliest, a year later than originally anticipated.

Deng Jianrong estimated that domestic routes will resume first, followed by short-haul routes, and then long-distance routes. However, Cathay Pacific will not only focus on short-haul routes. When there is demand in the market and the two governments switch, the company will return.

In early September, the government made preliminary contacts with 11 countries to discuss "tourism bubble" arrangements. Among them, Japan and Thailand have already had bilateral contacts.

Tang Kin-wing said that he is pleased to see the Hong Kong government launch the tourism bubble. He personally hopes that the authorities will make appropriate arrangements according to the risk factors of different regions. For example, passengers from low-risk areas need to undergo a quick test before leaving the country, and the test result is negative before they can board the plane. If the test result is still negative, the passenger does not need to be quarantined for 14 days; if it is a passenger from a high-risk area, even if they have completed the above-mentioned rapid test and the result is negative, Be quarantined.

"The specific methods of relevant measures must be decided by experts, and the most important thing is to make everyone feel at ease."

Deng Jianrong expects that Cathay Pacific's cash flow can only resume positive growth after the citizens traveling abroad reach the "critical mass".

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Considered launching "no destination" flights

However, even if there is a "tourism bubble", it does not mean that Cathay Pacific can "stop the bleeding" immediately. Deng Jianrong said that the financial situation will depend on when the epidemic eases and the passenger transport market returns to a certain level. He expects that when the tourism bubble is launched, the public may not necessarily There will be too much travel demand. I believe Cathay Pacific will still make a loss by then. Only when the people traveling abroad reach the "critical mass" can the company's cash flow resume positive growth.

"At present, Cathay Pacific is tightening 8% (capacity) and will continue to increase. As long as there is demand in the market, the company will do it. Of course, the market has to go back. Hong Kong people like to travel and want to go around. "

For some airlines launching "destinationless" flights, allowing passengers to "take a turn on the plane" in order to earn income, Deng Jianrong admitted that Cathay Pacific has indeed considered it, but even if the flight is destinationless, there is still a certain fuel cost. The route has to be reviewed and approved. The company will decide whether to launch it according to market demand, but I believe it will not help the business much.

Cathay Pacific purchased HKExpress for 4.93 billion yuan last year. However, a few months after the completion of the acquisition, it was hit by social movements and the epidemic. Deng Jianrong lamented that the acquisition of Express did not achieve the company's initial goals, but strategically, it was absolutely absolute. The correct approach is so that Cathay Pacific can cover the high-end and low-cost airline markets. "When the market returns to Li Guozhen, it is a good thing."

According to estimates by the International Air Transport Association, the new crown pneumonia epidemic will cause airlines in all regions to lose money this year, amounting to 84.3 billion US dollars (about 657.5 billion Hong Kong dollars), the largest loss in history.

At this difficult time, he led Cathay Pacific to "take off" again. Deng Jianrong, who had joined Cathay Pacific as an administrative trainee as early as 1982, said that his responsibility was very heavy and he was in a jittery mood. "If anything helps this good brand, it's good. The company, I will always be willing to do it... to keep the company operating and do better in the future, to maintain the status of Hong Kong's aviation hub and the largest and most positions."

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