Aug. 6 (Bloomberg) -- Cathay Pacific Airways Ltd., Asia's third-biggest carrier by market value, unexpectedly posted the first loss in five years after fuel costs almost doubled and it set aside funds to cover a U.S. price-fixing fine.

The first-half loss was HK$663 million ($85 million) or 16.8 Hong Kong cents a share, compared with net income of HK$2.58 billion, or 65.6 cents, a year earlier, the Hong Kong- based carrier said in a stock exchange statement today. The airline made a HK$468 million provision for the U.S. fine.

Cathay Pacific suffered more from record fuel costs than Singapore Airlines Ltd., Asia's most profitable carrier, as it made fewer advance purchases. The higher fuel costs and slowing demand mean the ``industry will not survive in its current form,'' Cathay Chairman Christopher Pratt said in the statement.

``Cathay didn't hedge enough and fuel costs went up really quickly,'' said Jack Xu, a Shanghai-based Sinopac Securities Co. analyst. ``It also didn't raise fares much, as it worried about curbing travel demand.'' He rates the carrier ``in-line.''

The airline's fuel-hedging gains plunged by a quarter to HK$365 million ($47 million) in the first half. It has hedged about 30 percent of its fuel needs for the year, Chief Executive Officer Tony Tyler said in May. Singapore Airlines, which regularly hedges as much as 60 percent of its fuel requirements, made a $253 million gain in the quarter ended June.

Cathay didn't hedge more because ``we are a conservative company,'' Pratt told reporters in Hong Kong today. Hedging is ``difficult to get right,'' as a sharp drop in oil costs can leave airlines locked into paying higher fuel prices.

Sales Increase

Cathay, Hong Kong's largest carrier, boosted first-half sales 23 percent to HK$42.4 billion. It was expected to post a profit of HK$1.03 billion, according to the median estimate in a Bloomberg News survey of three analysts.

``It's a distinct possibility Cathay might see a loss for the full year,'' said Hong Kong-based UBS AG analyst Damien Horth. ``The slowdown of the global economy is a big concern for business-class travel.'' He rates the carrier ``sell''.

Whether Cathay will be able to make a second-half profit will depend on fuel prices and how much it increases fares and surcharges by, Pratt said.

``If oil prices stay at the existing level, prices have to be adjusted,'' he said. ``This is the economic truth.''

Air France-KLM Group, British Airways Plc, Singapore Airlines and carriers worldwide have posted slumping profits this year as they grapple with record jet-fuel prices. Global air travel also grew at the slowest pace in five years in June, according to the International Air Transport Association.

``The environment is very challenging, given the high fuel prices,'' Greg Kuhnert, who helps manage at least $1 billion in Asian equities at Investec Asset Management in London, said before the announcement. He doesn't own Cathay Pacific shares.

No Route Cuts

Cathay Pacific made an operating loss before one-time items of HK$136 million, compared with an operating profit of HK$3.2 billion a year earlier. Still, it has no plans to join airlines such as Qantas Airways Ltd., Korean Air Lines Co. and Virgin Blue Holdings Ltd. in axing services, it said.

``Cost-savings will be made,'' Chief Executive Officer Tony Tyler said at the press briefing. The airline slashed its interim dividend to 3 Hong Kong cents from 25 cents last year.

The airline's first-half fuel bill almost doubled to HK$13.1 billion as it added flights and paid an average of 60 percent more per barrel. Fuel now accounts for about half of operating costs, compared with 39 percent a year earlier.

Cathay garnered HK$6.2 billion from fuel surcharges, a 63 percent increase. Still, the levies cover less than half the increased fuel costs, according to the carrier.

Cargo Fine

``It's a pretty poor result even adjusting for the fine,'' said Brent Mitchell, an analyst at Shaw Stockbroking Ltd. in Melbourne. ``It reflects fuel price increases that they probably haven't been able to pass on to customers.''

Cathay Pacific agreed to pay a $60 million fine to resolve a U.S. Department of Justice investigation into price-fixing by air-cargo carriers in June. Airlines including Air France and British Airways have also agreed deals.

Cathay Pacific and its Hong Kong Dragon Airlines Ltd. unit carried 12.5 million passengers in the first half, 14 percent more than a year earlier. The airlines filled 80.0 percent of seats with paying customers, a 1.9 percentage-point increase.

SARS Outbreak

The result was the worst for Cathay Pacific since the first-half of 2003, when it posted a HK$1.24 billion loss after slashing fares and giving away thousands of tickets to lure travelers back to Hong Kong following the outbreak of SARS, or Severe Acute Respiratory Syndrome.

The carrier was founded in September 1946 in Shanghai by American Roy C. Farrell and Australian Sydney de Kantzow with a single World War II surplus DC3 airplane named Betsy, which now hangs in the Hong Kong Science Museum.

Concerns about fuel costs have caused Cathay Pacific to plunge 28 percent this year in Hong Kong trading, compared with a 21 percent decline for the city's benchmark Hang Seng Index.

The airline, controlled by Swire Pacific Ltd., rose 0.4 percent to HK$14.74 yesterday. It didn't trade today as the Hong Kong stock exchange was closed because of a typhoon alert.

Cathay Pacific's group fleet, which includes the main unit, Dragonair and Air Hong Kong Ltd., a cargo venture with DHL, totaled 163 planes at the end of June, with 50 more on order.

To contact the reporter on this story: Wendy Leung in Hong Kong at wleung12@bloomberg.net

Last Updated: August 6, 2008 05:50 EDT