Author | Zhou Zhiyu
&#34;The price of aviation fuel in March has nearly doubled compared to January and February.&#34;
Cathay Pacific Group CEO Ronald Lam presented a set of data on March 12 that highlighted the challenges currently faced by the aviation industry. Just a day earlier, the group had reported its third consecutive year of profitability, and the atmosphere should have been relaxed.
Cathay Pacific Group is expected to achieve a profit of HKD 10.8 billion in 2025, and HKD 9.9 billion in 2024. The airline and its subsidiaries contributed HKD 10 billion, while associates contributed HKD 447 million. Overall, the performance benefited from increased capacity, stable passenger load factors, and resilient cargo demand, but was offset by the normalization of passenger yield and losses from Hong Kong Express.
However, the situation in the Middle East is not favorable.
Brent crude oil was around USD 60 in January. In late February, shipping through the Strait of Hormuz was disrupted. On March 3, it reached USD 85. On March 7, it hit USD 92, a nearly 28% increase in a single week, the largest since 1991. On March 9, it surged to USD 119.5 before crashing back to USD 83, with a fluctuation of over 40% within 24 hours.
Aviation fuel is the largest single cost for airlines, accounting for nearly 30% of operating expenses. With oil prices doubling, the impact on costs is acute.
Ronald Lam provided a response plan. First, fuel hedging. He mentioned that 30% of fuel has been hedged this year; second, an increase in fuel surcharges. Both passenger and cargo services will see adjustments. This is a standard action in the aviation industry and will ultimately be passed on to ticket prices.
He pointed out, &#34;Our goal is to preserve all our capacity and not reduce flights due to rising costs.&#34;
However, there is more to the situation than just costs.
Ronald Lam explained to Wall Street Insights the changes occurring on the demand side. Middle Eastern airlines have seen a sharp decline in capacity, and passengers who previously transited through Dubai or Doha to Europe, America, and Australia need to find alternative hubs. &#34;In the short term, we have seen an increase in demand for our long-haul flights.&#34; The same applies to cargo. Middle Eastern airlines also have significant cargo capacity, and &#34;Cathay's cargo demand has also seen an increase in the short term.&#34;
Emirates, Qatar Airways, and Etihad Airways together account for about 10% of global international air passenger traffic. With a sudden lack of capacity, passengers are looking for alternative routes. Singapore, Tokyo, and Hong Kong are all stepping in. Cathay holds just over half of the market share at Hong Kong Airport, and this scale of hub airline will have considerable capacity to absorb during the Middle Eastern capacity vacuum.
The cost side is bleeding, while the demand side is gaining. Which side moves faster depends on how long the conflict lasts.
If tensions cool within a few weeks and oil prices fall, Cathay will benefit from a window of demand overflow combined with declining costs. If it drags on for a month or two, the gap that surcharges and hedging can cover at high oil prices will be widened.
Ronald Lam did not treat the Middle East as an isolated incident. He stated that whether it is the Middle East crisis or trade wars, after the normalization of the aviation industry, external shocks come one after another. He emphasized the need to optimize cost efficiency while the situation is at its best, so that no matter what happens in the future, the company can remain stable and avoid large-scale layoffs as seen in history
The signal from this statement is very clear: the management does not believe that HKD 10.8 billion can be linearly extrapolated. They are preparing for uncertainty.
This is also an angle to understand this earnings report.
Normalization of yields is a noteworthy signal.
The supply-demand mismatch dividend enjoyed by the aviation industry in the three years post-pandemic is fading, and ticket prices are returning to normal. Liu Kaishi did not shy away from this point during the communication meeting, but she emphasized the volume— the group carried 36 million passengers throughout the year, a year-on-year increase of 27%, outperforming Hong Kong Airport's 15% passenger growth rate. The group opened 20 new routes throughout the year, covering over 100 destinations, with 5 new routes added in the mainland. Capacity is expected to increase by another 10% by 2026.
Hong Kong Express needs to be mentioned separately. Capacity growth exceeded 30%, carrying nearly 8 million passengers, contributing 12 out of the 20 new routes.
In terms of cargo, e-commerce has decreased in the cargo composition due to tariff issues, but there has been significant growth in high-tech, AI hardware, and fresh agricultural products. Liu Kaishi mentioned that the team is flexibly adjusting the route network and seeking new cargo sources, with cargo covering 40 destinations globally and 36 direct flights to 6 cities in the mainland each week. Hong Kong has retained its title as the world's busiest cargo market for the 14th consecutive year, with Cathay being the largest cargo operator among them.
The mainland market is another keyword that has been repeatedly emphasized.
Zheng Jiajun attended for the first time as a director from mainland China, and he positioned the mainland as &#34;an important engine for future growth&#34; right from the start. The number of mainland destinations has reached 24, making it the non-mainland airline with the most routes between Hong Kong and the mainland. The multi-modal transport in the Greater Bay Area is extending to the Yangtze River Delta. There are over 4,000 employees in the mainland, including 800 cabin crew.
He specifically mentioned the boutique portal at Shekou Terminal—exclusive VIP lounges and check-in counters, allowing passengers to go directly from Shekou Terminal to the departure area of Hong Kong Airport without needing to enter or exit Hong Kong.
In terms of dividends, a total of HKD 5.2 billion was distributed as an ordinary share dividend of 84 cents per share for the year. In addition to salary increases in 2026, employees received over 11 weeks' worth of salary through bonuses and profit-sharing.
Lin Shaobo stated that the team size has been rebuilt to 33,000 people, and this year it basically only needs to be maintained. The cumulative profit over the past three years has exceeded HKD 30 billion, and in his words, &#34;it has already surpassed our HKD 30 billion loss during the pandemic.&#34;
The numbers on the books look good. However, Lin Shaobo repeatedly used the word &#34;consolidate&#34; rather than &#34;expand&#34; during the communication meeting. He said that what has been done well in the next five years should be consolidated, and what can be done better should continue to improve. The wording is cautious.
2026 is the first year of Cathay's new five-year plan and also its 80th anniversary. This year, 8 new aircraft will be received (5 for Hong Kong Express and 3 for Cathay), with the first Boeing 777-9 long-haul aircraft arriving next year, and A330-900 and A350F freighters being received in 2028. There are still over 100 new aircraft queued for delivery, with total investments far exceeding HKD 100 billion.
All expansion plans are laid out on the table; the disruption caused by the Middle East has only altered the rhythm.
Lin Shaobo said at the end of the communication meeting that over the past many years, he has faced many challenges and has overcome them one by one.
He followed up with the second half of the sentence: &#34;I hope and believe that this time we can also find a way to overcome this challenge.&#34;
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Cathay Pacific Group is facing pressure from the doubling of aviation fuel prices, leading to a sharp increase in costs. Although profits are expected in 2024 and 2025, the situation in the Middle East has affected shipping, resulting in changes in demand. Lin Shaobo mentioned that fuel hedging and surcharge increases are countermeasures. At the same time, due to the decrease in capacity from Middle Eastern airlines, Cathay's long-haul flights and cargo demand have increased, indicating market opportunities for Cathay in the capacity gap

- Cathay Pacific's CEO, Ronald Lam, highlighted a significant surge in aviation fuel prices, doubling from January to March, impacting the airline industry.  
- Despite strong financial results with a profit of HKD 10.8 billion in 2025, rising oil costs pose challenges, emphasizing the need for strategies like fuel hedging and fare adjustments.  
- The demand for long-haul flights is increasing amidst reduced capacity from Middle Eastern carriers, prompting adjustments in service routes and operational focus for future profitability.

Cathay Pacific under the Middle East changes: Cost pressure, demand surge