Cathay Pacific: pandemic drag outweighs recovery uplift

Cathay Pacific’s motto “Move Beyond” is proving hard for the Hong Kong flag carrier to put into practice. New quarantine rules mean the pandemic increases the drag factor on financial recovery. The shares fail to discount this fully.

The net loss for 2020 was $2.8bn, the worst in the airline’s 75-year history. The figure undershot low market expectations as impairment charges and restructuring costs surged to about $1bn. Passenger traffic fell 99 per cent in January.

Near the end of last year, Cathay’s outlook improved as vaccination programmes began. The business had already received a $5bn recapitalisation led by the Hong Kong government. Shares gained more than a third from a September low, reflecting hopes that air travel and liquidity were on the mend

Unfortunately, new lockdown rules dealt a pandemic aftershock. Hong Kong shut its borders to non-residents and imposed a 21-day mandatory quarantine, the longest in the world, for residents in December.

Cathay has now put most of its crew on three-week shifts followed by two weeks in a hotel, then two weeks off at home. This has increased Cathay’s cash burn by up to 27 per cent, or $245m a month. Passenger capacity has fallen 60 per cent and cargo by a quarter. Cathay depended on freight for almost two-thirds of its sales last year.

The short-term outlook is bleak. Vaccination is progressing slowly in mainland China, the home of many Cathay passengers. Some people that can travel have switched to mainland airlines. Cathay boosted its available liquidity to more than $3.7bn at the end of last year. That is just over one year’s runway at the increased burn rate, though quarantine rules should ease before then.

That should be just enough to limit any losses in Cathay’s share price this year. However, the stock has risen sharply in recent months. It trades significantly higher than during the much shorter and less financially damaging Sars outbreak on an enterprise value to trailing ebitda basis. This is unrealistic. Investors should take profits.

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