The No1 carrier in Hong Kong announced an interim loss of $1.24 billion on Wednesday, better than a market consensus estimate of about $1.44 billion.

Simon Gresham at Merrill Lynch, who upgraded his recommendation to 'neutral' from 'sell', said he expected a quick recovery in yields.

'In light of the robust volume recovery, discount fares have been significantly reduced and late June or July is likely to be the low point in yields. This implies a faster recovery in yields than we had previously expected,' Mr Gresham said.

Nomura Securities said the Hong Kong to Beijing route would bring Cathay at least 58,000 passengers a year, increase revenue by $255 million and add $26 million to its bottom line.

Anil Daswani, at Citigroup Smith Barney, who is maintaining his 'outperform' rating, was also optimistic about the carrier's China operations.

'In the longer term, the [China] aviation market is one of the fastest growing in the region and the opportunity to participate in it could boost the earnings outlook for Cathay,' he said.

Cathay's chairman James Hughes-Hallett said the carrier would go ahead with the Beijing service this year regardless of whether Dragonair files for a judicial review of the Air Transport Licensing Authority's decision to allow the Hong Kong airline to operate in China.

Mr Hughes-Hallett said Cathay was applying for landing slots at Beijing Capital International Airport and would try to obtain traffic rights to Shanghai and Xiamen through the next round of air service negotiations.

Jim Wong at BNP Paribas Peregrine, who is maintaining a rating of 'outperform', said there would be further room for an upward revision in earnings for the carrier later in the year.

'Given a faster and stronger-than-expected recovery as indicated by the management, re-rating is possible should Cathay deliver on flights to Beijing by winter this year,' he said.

However, the analysts cautioned that the threat of terrorism and fears about the re-emergence of Sars would remain a concern for the carrier.