SYDNEY/HONG KONG (Reuters) – Hong Kong will lead a $5 billion rescue of Cathay Pacific Airways, which like other airlines has been hit by a global travel slump triggered by the coronavirus pandemic.

The government’s involvement in the recapitalisation follows the double blows of Hong Kong’s political unrest and the coronavirus outbreak, which Cathay said meant it was burning through about HK$3 billion ($387 million) a month in cash.

Around the world, states have been bailing out airlines and in some cases, such as Germany’s Lufthansa, taking direct equity stakes to keep them flying.

“The alternative would have been a collapse of the company. Commercial debt markets are effectively closed to airlines today who do not have extensive government shareholder support,” Cathay Chairman Patrick Healy told reporters on Tuesday.

Cathay has grounded most of its planes, flying only cargo and a skeleton passenger network to major destinations such as Beijing, Los Angeles, Sydney and Tokyo.

Like Singapore Airlines, which received an up to $10.1 billion rescue package led by state-investor Temasek, Cathay has no domestic market to cushion the international loss.

Finance Secretary Paul Chan said the investment in Cathay was to help protect Hong Kong’s role as a leading international aviation hub while generating a reasonable financial return.

“It is not our intention to become a long term shareholder of Cathay Pacific,” he told reporters. “It is not our intention to interfere with the operation and management of Cathay.”

Under the rescue plan, the Hong Kong government will be issued HK$19.5 billion of dividend-paying preference shares and HK$1.95 billion of warrants, giving it a 6% stake.

It would also provide a HK$7.8 billion bridging loan and would have the right to two non-voting observers at board meetings. Chan said they would be seasoned business professionals.

The deal includes a HK$11.7 billion rights issue to existing shareholders, led by Swire Pacific Ltd and Air China Ltd, which had halted trading on Tuesday morning alongside Cathay, pending the announcement.

Swire, which holds 45%, Air China which owns 30% and Qatar Airways with 10% plan to participate in the rights issue, Cathay said. Their holdings will fall to 42%, 28% and 9.4% due to the government stake.

POST-COVID TAKEOFF

BOCOM International analyst Luya You said the combined package would provide more than enough funding for Cathay.

“A recapitalisation plan of this size bodes well for Cathay’s long-term future,” she said. “Big airlines with sufficient liquidity can actually gain significant market share immediately post-COVID.”

Cathay said a fall in passenger revenue to only 1% of the previous year’s levels meant it had been losing cash at a rate of HK$2.5 billion to HK$3 billion per month since February.

It has furloughed some pilots at overseas bases and cut cabin crew roles in the United States and Canada, but has not announced large-scale permanent job losses.

The airline said it would put in place a further round of executive pay cuts and a second voluntary leave scheme.

Chairman Healy said “tough decisions” would be made in the fourth quarter after it reviewed all aspects of its business model, including its aircraft orders.

China’s aviation regulator may make it difficult for it to merge regional arm Cathay Dragon into its main brand because of infractions during last year’s pro-democracy protests, two sources told Reuters last month.

($1 = 7.7500 Hong Kong dollars)