Cathay in the Changing Middle East: Cost Pressure, Surging Demand

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Author | Zhou Zhiyu

"In March (aviation fuel prices) were almost double compared to January and February."

A set of data presented by Cathay Group CEO Lam Siu Po on March 12 revealed the difficult challenges facing the aviation industry. Just one day earlier, the group had posted its third consecutive year of profits — an occasion that should have been relaxed.

Cathay Group's attributable profit in 2025 is HKD 10.8 billion, compared to HKD 9.9 billion in 2024. Airlines and subsidiaries contributed 10 billion, associates contributed 447 million. Overall, the performance benefited from increased capacity, solid passenger load factors, and resilient cargo demand, but was offset by the normalization of passenger yield and losses at Hong Kong Express.

However, the Middle East situation is not cooperating.

Brent crude oil was around $60 in January. At the end of February, shipping in the Strait of Hormuz was interrupted. On March 3, it was $85. On March 7, it rose to $92 — nearly a 28% increase in a single week, the biggest since 1991. On March 9, it surged to $119.5 intraday before dropping back to $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. The doubling of oil prices causes acute shocks on the cost side.

Lam Siu Po offered countermeasures. First, fuel hedging. He said 30% of 2024's fuel was hedged. Second, surcharges on aviation fuel — both for passenger and cargo. This is a standard move in the industry and will eventually be passed on to ticket prices.

He stated, "Our goal is to maintain all our capacity without having to cut flights due to rising costs."

But there is more to the story than just costs.

Lam Siu Po told Wallstreetcn about changes in demand. Middle East airlines saw a sharp drop in capacity. Passengers who used to transfer via Dubai or Doha to Europe, America, or Australia now need to find different hubs. "In the short term we have seen an increase in demand for our long-haul flights." Same for cargo. Middle Eastern airlines have significant cargo capacity, "Cathay Cargo has also seen increased short-term demand."

Emirates, Qatar Airways, and Etihad Airways together carry about 10% of global international passenger traffic. With a sudden loss of capacity, travelers need alternative routes. Singapore, Tokyo, and Hong Kong are all picking up the slack. Cathay accounts for just over half of Hong Kong Airport's share, making it a major hub capable of handling Middle East capacity shortages.

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

If things cool down in a few weeks and oil prices fall, Cathay will benefit from a window where demand overflow combines with lower costs. If it drags on for one or two months, the gap covered by surcharges and hedging under high oil prices will widen.

Lam Siu Po did not treat the Middle East as an isolated event. He said, whether it’s the Middle East crisis or trade wars, once the aviation industry normalizes, external shocks come one after another. He wants to optimize cost efficiency while in the best possible position, so that future challenges won’t cause massive layoffs like in past recessions.

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 lens through which to interpret this earnings report.

Yield normalization is a noteworthy signal.

The supply-demand mismatch benefits enjoyed by the aviation industry in the three years after the pandemic are fading, ticket prices are returning to normal. At the briefing, Liu Kaishi acknowledged this point but emphasized volume—Cathay Group carried 36 million passengers in a year, up 27%, outpacing Hong Kong Airport's 15% passenger growth. Twenty new routes opened, the network now covers more than 100 destinations, with 5 new destinations in mainland China. Capacity is expected to grow another 10% in 2026.

Hong Kong Express needs to be discussed separately. Capacity grew by over 30%, nearly 8 million passengers, contributing 12 of the 20 new routes.

In cargo, e-commerce shipments shrank due to tariff issues, but high-tech, AI hardware, and fresh agricultural products grew significantly. Liu Kaishi said the team adjusts the network flexibly and finds new cargo sources. Cargo covers 40 global destinations, with 36 weekly flights to six cities in mainland China. Hong Kong has held the title of busiest air cargo market globally for 14 consecutive years, with Cathay the largest cargo carrier.

Mainland market is another repeatedly emphasized keyword.

Zheng Jiaju attended as a mainland director for the first time, and immediately positioned mainland China as "the major engine for future growth." Cathay now serves 24 mainland destinations — the most for any non-mainland airline. The multimodal transport in the Greater Bay Area is expanding into the Yangtze River Delta. Mainland employees exceed 4,000, including 800 cabin crew.

He specifically mentioned Shekou Port’s boutique gateway— dedicated lounge, dedicated check-in counters — where passengers can go directly from Shekou Port to Hong Kong Airport’s departure area without having to go through Hong Kong immigration.

Regarding dividends, a total of HKD 5.2 billion will be paid, with an annual ordinary dividend of HKD 0.84 per share. Besides the 2026 raise, employees will receive bonuses and profit-sharing equivalent to over 11 weeks' wages.

Lam Siu Po said the team has rebuilt its size to 33,000 people and only needs to maintain this in 2024. Over the past three years, accumulated profit exceeded HKD 30 billion. In his words, "we have already surpassed the 30 billion loss during the pandemic."

The numbers look great on the books. Yet at the briefing, Lam Siu Po repeatedly used "consolidate," not "expand." He said what has been done well in the past five years needs consolidation, what is done best must be further improved. The wording is cautious.

2026 is the first year of Cathay's new five-year plan and marks its 80th anniversary. Eight new aircraft will be delivered this year (5 for Express, 3 for Cathay); next year brings the first Boeing 777-9 long-haul jet; 2028 brings the A330-900 and A350F freighters. Over 100 new aircraft are queued for delivery, with total investment far exceeding HKD 100 billion.

All expansion plans are on the table; the Middle East only disrupts the tempo.

Lam Siu Po said as the briefing ended that Cathay has overcome many challenges in recent years.

He quickly added, "I hope and believe that this time, too, we can find a way to overcome this challenge."

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