Cathay Pacific Under Middle East Turmoil: Cost Pressure and Surging Demand

Author | Zhou Zhiyu

“Compared to January and February, aviation fuel prices nearly doubled in March.”

Cathay Group CEO Lin Shaobo shared a set of data on March 12, revealing the current difficulties faced by the airline industry. Just a day earlier, the group reported its third consecutive year of profitability, making the scene seemingly relaxed.

Cathay Group’s attributable profit for 2025 is HKD 10.8 billion, and HKD 9.9 billion for 2024. The airline and its subsidiaries contributed HKD 10 billion, associates HKD 447 million. Overall, performance benefited from increased capacity, steady passenger load factors, and resilient freight demand, but was offset by normalization of passenger yields and losses from Hong Kong Express.

However, the Middle East situation is not giving any face.

Brent crude oil was around $60 in January. In late February, shipping through the Strait of Hormuz was interrupted. On March 3, it hit $85. On March 7, it rose to $92, nearly a 28% weekly increase—the largest since 1991. On March 9, intraday prices surged to $119.5 before falling back to $83, with over 40% volatility within 24 hours.

Aviation fuel is the largest single cost for airlines, accounting for nearly 30% of operating expenses. Doubling oil prices causes an acute impact on costs.

Lin Shaobo outlined responses. First, fuel hedging. He said 30% of fuel was hedged this year. Second, increasing fuel surcharges—applied to both passenger and cargo services. These are standard industry measures and will ultimately be reflected in ticket prices.

He emphasized, “Our goal is to preserve all our capacity, so we don’t need to cut flights due to rising costs.”

But costs are not the only issue.

Lin Shaobo explained demand-side changes to Wallstreetcn. With Middle Eastern airlines reducing capacity sharply, passengers who previously transited through Dubai or Doha to Europe, the Americas, or Australia need alternative hubs. “In the short term, we see increased demand for long-haul flights.” The same applies to freight. Middle Eastern carriers also have significant freight capacity, and “Cathay’s freight demand has also seen some short-term increase.”

Emirates, Qatar Airways, and Etihad together account for about 10% of global international passenger traffic. With capacity suddenly missing, travelers are seeking alternatives. Singapore, Tokyo, and Hong Kong are stepping in. Cathay holds just over half of Hong Kong airport’s market share, and as a hub airline of this scale, its ability to absorb Middle Eastern capacity vacuum is substantial.

Costs are bleeding, demand is gaining. Which side moves faster depends on how long the conflict lasts.

If tensions ease within weeks and oil prices fall, Cathay could benefit from a demand surge combined with lower costs. If it drags on for a month or two, the gap that surcharges and hedging can cover will widen.

Lin Shaobo did not treat the Middle East as an isolated event. He said, whether it’s the Middle East crisis or trade wars, the airline industry faces external shocks one after another once normalization occurs. He stressed the importance of optimizing cost efficiency now while conditions are best, so that regardless of future challenges, the company can stay stable and avoid large-scale layoffs like in the past.

The message is clear: management does not believe HKD 10.8 billion can be linearly extrapolated. They are preparing for uncertainty.

This is also a key perspective for understanding this earnings report.

Normalization of yields is a noteworthy signal.

The post-pandemic three-year supply-demand mismatch bonus in the airline industry is fading, and fares are returning to normal. Liu Kaishi did not shy away from this point at the communication meeting but emphasized volume—group passenger numbers reached 36 million for the year, up 27%, outperforming Hong Kong airport’s 15% passenger growth. The network added 20 new routes, covering over 100 destinations, with five new routes to mainland China. Capacity is expected to increase another 10% in 2026.

Hong Kong Express deserves special mention. Capacity grew over 30%, with nearly 8 million passengers, and 12 of the 20 new routes contributed.

In freight, e-commerce has decreased in freight composition due to tariffs, but high-tech, AI hardware, and fresh agricultural products have grown significantly. Liu Kaishi said the team is flexibly adjusting routes and sourcing new freight, covering 40 destinations worldwide, with 36 weekly flights directly connecting to six mainland Chinese cities. Hong Kong has ranked as the world’s busiest freight market for 14 consecutive years, with Cathay being the largest freight operator.

The mainland market is another repeatedly emphasized keyword.

Zheng Jiajun attended for the first time as a director representing mainland China, positioning the mainland as “a key engine for future growth.” Mainland routes now total 24, making them the most numerous non-mainland carriers operating between Hong Kong and the mainland. The Greater Bay Area’s multimodal transport is extending into the Yangtze River Delta. Over 4,000 mainland employees, including 800 flight attendants.

He highlighted the premium VIP lounge at Shekou Port—exclusive lounges and check-in counters, allowing travelers to go directly from Shekou to Hong Kong airport’s departure area without entering Hong Kong immigration.

Regarding dividends, the group paid HKD 0.84 per share in cash dividends for the year, totaling HKD 5.2 billion. Employees received more than 11 weeks’ worth of wages through bonuses and profit sharing, in addition to salary increases in 2026.

Lin Shaobo said the team has been rebuilt to 33,000 people, and this year they mainly need to maintain that. Over the past three years, the company has accumulated over HKD 30 billion in profit, which he said “already surpasses the HKD 30 billion loss during the pandemic.”

The financial figures look good. But Lin Shaobo repeatedly used the word “consolidate” rather than “expand” during the meeting. He said that the next five years will focus on consolidating what has been achieved and further improving what is already good. His wording is cautious.

2026 marks the first year of Cathay’s new five-year plan and its 80th anniversary. The group will receive 8 new aircraft this year (5 Express, 3 Cathay), and in 2024, the first Boeing 777-9 long-haul aircraft will arrive. In 2028, they will receive A330-900 and A350F freighters. Over 100 new aircraft are scheduled for delivery afterward, with total investments exceeding HKD 100 billion.

All expansion plans are on the table; only the rhythm has been disrupted by the Middle East turmoil.

Near the end of the meeting, Lin Shaobo said that over the years, they have faced many challenges and have overcome each one.

He then added: “I also hope and believe that this time, we can find a way to overcome this challenge too.”

Risk warning and disclaimer

Market risks, investment caution advised. This article does not constitute personal investment advice and does not consider individual users’ specific investment goals, financial situations, or needs. Users should consider whether any opinions, viewpoints, or conclusions herein are suitable for their circumstances. Invest at your own risk.