Costs becoming a drag on Cathay Pacific

Soaring costs threaten to clip the wings of Cathay Pacific Airways, Ltd.

Based in Hong Kong, the airline warned that it might have to idle aircraft and cut flights if weaker demand and high fuel costs persist.

"Fuel prices remain at crippling highs and our cargo business still shows no sign of any sustained pick-up," said Cathay Pacific Chief Executive John Slosar. "The recent turmoil in the Euro zone reinforces the fact that the world is still balancing on a knife edge.”

Cathay’s business has worsened over the last month with passenger yields (a key measure of passenger profitability) continuing to fall in economy-class.

The first- and business-class cabins, which have traditionally been Cathay’s most profitable business segments, have shown no signs of weakness, however.

The airline said that revenue growth in recent weeks has dropped well short of target has failed to keep pace with capacity growth. It said the recent development isn't a sustainable situation.

In March, Cathay reported a 61% drop in net profit for 2011 due to rising fuel costs and softer demand for its freight services. It expects continued weakness for its cargo operations in 2012.

Also last year, Cathay fuel costs, which accounted for over 40% of its total operating costs, rose 38% to HK$39 billion from HK$28 billion in 2010.