Aug. 6 (Bloomberg) -- Cathay Pacific Airways Ltd., Hong Kong’s biggest carrier, may rip out some premium-class seats and install more economy seating as companies cut travel budgets during the recession.

“We’re going to have to make fundamental changes to our business” if premium and cargo demand doesn’t return, Tony Tyler, the airline’s chief executive officer, said in a Bloomberg TV interview today. “We have got to get our costs below the levels of our revenues.”

Qantas Airways Ltd., Australia’s biggest carrier, has also said it’s considering removing some business and first-class seating as companies force executives to fly coach or stay at home. Worldwide premium-class travel plunged 21 percent in the first five months of the year, according to the International Air Transport Association.

Front-end demand has “collapsed due mainly to changes in corporate travel policies,” Andrew Au, a Cazenove Asia Ltd. analyst, said in a note to clients today. “The outlook remains difficult and we project deepening losses” for Cathay.

Au reiterated an “underperform” rating on the airline, while raising his target price to HK$6.50 from HK$5.00. Deutsche Bank AG analyst Joe Liew downgraded Cathay to ‘hold’ from ‘buy’.

The airline fell 3.6 percent to HK$11.74 in Hong Kong trading. The Hang Seng Index company has gained 35 percent this year, compared with the benchmark’s 45 percent rise.

Parked Planes

The carrier said yesterday that it will park six passenger planes by year-end, as well as five freighters, as the recession hammers travel. Passenger numbers, including at unit Hong Kong Dragon Airlines Ltd., fell 4.2 percent in the first half. Passenger yield, a measure of average sales, plunged 20 percent.

“Hopefully, we will see some pick-up in premium in second half,” Tyler said. “There are some positive signs” for cargo demand, he added. First-half freight volumes tumbled 15 percent.

Cathay Pacific ended a run of two straight net losses in the first half on a HK$2.1 billion ($271 million) hedging gain and a 52 percent drop in fuel prices. The airline has also cut capacity, offered staff unpaid leave and begun talks about delaying new aircraft in a bid to trim expenses.

Excluding the hedging gain and other one-off items, the airline made a HK$626 million loss in the first half, according to a Credit Suisse Group AG note today.

The airline slumped to its first annual loss in a decade last year after making HK$7.6 billion of unrealized losses on fuel hedges stretching out until 2011.

To contact the reporter on this story: Wendy Leung in Hong Kong at wleung12@bloomberg.net; Bernard Lo in Hong Kong at blo2@bloomberg.net

Last Updated: August 6, 2009 04:49 EDT