A traveller works on a computer as a Cathay Pacific jet leaves. The firm's share price posted its biggest single-day drop in nearly two years on Wednesday. Nelson Ching / Bloomberg

The share price of Cathay Pacific Airways Ltd, Hong Kong's biggest carrier, plunged more than 7 percent Wednesday on concerns that rising fuel prices and economic uncertainty in the West will dramatically pull down industry earnings in 2011.

The drop occurred after the release of an unfavorable industry report from the International Air Transport Association (IATA).

The share price of Cathay closed at HK$22 Wednesday, down 7.17 percent from the previous trading day. It fell as low as HK$21.55 during trading, posting the biggest single-day drop in nearly two years.

Airlines across the board all suffered losses Wednesday, with Cathay Pacific leading the way. The share price of Air China Ltd, the nation's largest international carrier and part-owned by Cathay, lost 5.74 percent to HK$8.37. China Southern Airlines Ltd closed at HK$4.52, down 3.83 percent.

IATA Chief Executive Officer Giovanni Bisignani said in Geneva on Tuesday that airlines in 2011 may post a 40 percent decline in combined profit to $9.1 billion from $15.1 billion this year. The profit margin will fall by almost half to 1.5 percent, while revenue is set to grow 5.8 percent to $598 billion, said Bisignani.

"The recovery cycle will pause in 2011. Although the $9.1 billion profit projection for 2011 is better than we had previously forecast, next year the industry will face tougher conditions than what we are experiencing today," he said.

IATA's previous global profit forecasts for 2010 and 2011, made in September, were $8.9 billion and $5.3 billion respectively.

Defining what they mean by "tougher conditions", the industry group referred to slower economic growth, higher fuel costs and austerity measures in Europe.

Crude oil was trading at $87.4 per barrel in New York on December 15 at press time. Prices have risen 27 percent in the past 12 months.

Kelvin Lau, an aviation analyst at Daiwa Institute of Research in Hong Kong, thinks that the IATA remarks should not be taken as final as they always change their estimates and lag behind the market.

Lau said that prior to the IATA news, the market had been too optimistic.

Lau thinks that oil prices should not be a major concern right now, as it is only rising gradually rather than the surge from $100 to $150 per barrel that was seen in 2008. He predicted that industry growth will return to a normal cycle after a bumper 2010 and probably will register single-digit growth. "Cathay will be in line with industry growth prospects in 2011," Lau said.

Cathay's November passenger traffic rose 8.7 percent, the slowest expansion in at least four months, and freight volume gained 8.4 percent. The company forecast in mid November that its 2010 full-year profit will be at least HK$12.5 billion, following profit of HK$4.69 billion in 2009 and a loss of HK$8.70 billion in 2008.

Meanwhile, mainland-based airlines are plagued by concerns that a wider high-speed rail network there may ultimately snatch some market share from airlines in the future, some market watchers said.

The Central Government is putting much effort into building this network in order to foster more balanced development in the national economy.

Bloomberg contributed to this story.

China Daily

(HK Edition 12/16/2010 page2)