April 17 (Bloomberg) -- Cathay Pacific Airways Ltd., Hong Kong’s largest carrier, will cut capacity for the first time since the 2003 SARS outbreak and ask all staff to take unpaid leave as it battles plunging travel demand.

The airline will reduce the planned passenger capacity at its main unit by 8 percent from May and by 13 percent at its Hong Kong Dragon Airlines Ltd. arm, it said today in a statement. More steps may be needed if demand doesn’t recover, said Chief Executive Officer Tony Tyler, who will be taking unpaid leave.

The company’s first-quarter sales from passenger and cargo flights tumbled 22 percent as it slashed fares and carried fewer travelers because of the global recession. Qantas Airways Ltd. said earlier this week that it will fire about 5 percent of its workforce and delay planes as demand weakens.

“This slowdown will be deeper and longer” than previous recessions, said Winson Fong, who helps manage $2 billion at SG Asset Management H.K. Ltd. in Hong Kong. “The bad news will continue to come.”

The carrier fell 3.4 percent to HK$9.25 in Hong Kong, while the benchmark Hang Seng Index gained 0.1 percent.

Cathay Pacific will pare flights to cities including London, Paris, Frankfurt, Sydney, Singapore and Tokyo, it said in a statement. The carrier is also in talks to delay new planes.

“If the market continues to deteriorate, we’ll have to do more,” Tyler told reporters in Hong Kong. He didn’t say how much unpaid leave he will be taking.

Tyler, Chairman Christopher Pratt and Chief Operating Officer John Slosar will also all forego 2008 bonuses, the carrier said. Bonuses for other senior managers have been cut.

Unpaid Leave

Staff will be offered as much as four weeks unpaid leave, depending on their seniority. The carrier hopes to match the 99 percent uptake it received during the 2003 Severe Acute Respiratory Syndrome outbreak, which decimated travel.

The current situation “is worse than SARS,” Tyler said. The question now is “How long it will last?”

Dragonair will halt flights to Fukuoka, Japan, and to the Chinese cities of Dalian, Shenyang, Guilin and Xian. It will cut services to cities including Busan, South Korea, and Shanghai.

Cathay Pacific will also park two more Boeing Co. 747 freighters, raising the total to five, and lease another to its venture with DHL as it cuts cargo capacity 11 percent.

The airline has previously offered flight staff voluntary unpaid leave, curbed capacity growth and delayed a cargo terminal in Hong Kong to cut costs.

Last year, it posted a HK$7.9 billion loss after making wrong-way bets on fuel prices and suffering from waning demand. Its first-quarter passenger numbers fell 2.7 percent, while capacity rose 0.1 percent. Affiliate Air China Ltd. yesterday reported a 5.7 percent decline in first-quarter profit on waning international travel and investment losses.

Singapore Airlines Ltd. and Qantas have cut costs after Asia-Pacific carriers’ traffic sank almost 13 percent in February, the steepest decline since June, according to the International Air Transport Association. Asia-Pacific carriers will likely post combined losses of $1.7 billion this year, the most for any region, according to the trade group.

To contact the reporter on this story: Wendy Leung in Hong Kong at wleung12@bloomberg.net; Chan Sue Ling in Singapore slchan@bloomberg.net

Last Updated: April 17, 2009 06:07 EDT