Citi has issued a research report commenting on the annual results of CATHAY PAC AIR (00293) for the period ending December last year. The airline reported core profit of HK$6.1 billion for the second half of the year, representing a 7% year-on-year increase. Excluding contributions from associates, core profit stood at HK$5.4 billion, up 43% compared to the first half and 8% higher than the same period last year. The full-year performance achieved 107% and 108% of Citi's and market expectations, respectively.
Despite these results, Citi has maintained its "Sell" rating on the stock, citing factors such as weak growth in outbound travel from China. The target price remains at HK$11.2 per share. The bank noted that, prior to the escalation of tensions in the Middle East, Cathay Pacific had already achieved strong passenger load factors on long-haul routes. The airline has since observed a short-term surge in demand for travel to Europe and Australasia, which together account for approximately 29% of its capacity. Similarly, transit passenger demand for South Asia and North America has also increased temporarily.
On the downside, Cathay Pacific has hedged 30% of its projected fuel consumption for 2026 at a Brent crude price of $70 per barrel. As a result, the airline will bear the full risk of any widening in the jet fuel crack spread. Citi estimates that if spot jet fuel prices rise by $10 per barrel from the current $78, Cathay would need to increase passenger unit revenue by approximately 10% on routes to Europe, Australasia, and South Asia—regions directly benefiting from disruptions in Middle Eastern hub operations—to fully offset the impact of higher fuel costs.
While such fare increases may be feasible for essential travelers in the short term (one to two months), data from ScienceDirect indicates that the global price elasticity of demand for air tickets is -0.87. This suggests that, all else being equal, higher ticket prices would lead to a corresponding decline in travel demand.
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