BESET by a downturn in Taiwan traffic and lower-than-expected passenger revenue from the Japan market, Cathay Pacific Airways has reported a disappointing 18 per cent increase in net profit for the first six months of the year, compared with the same period last year. The airline posted profit attributable to shareholders for the first half of $803 million, compared with $681 million last year. The lacklustre results were partly attributable to a 37 per cent decrease in interest and investment income, which fell from $515 million to $324 million. One analyst said this was the result of a poor performance by the company on the bond market. It was also burdened by a 57 per cent increase in exchange differences on long-term loans and leasing obligations. Cathay reported a slight increase in load factor on its aircraft from 67 to 68.9 per cent. According to analysts, the airline's load factor in the first three months was satisfactory, but fell away in the second quarter, as traffic with Taiwan dropped and fare-cutting by Japanese airlines cut into market share. The yield, or revenue per seat, remained flat. A 2.1 per cent drop in yield was reported for the six-month period. Turnover was $12.39 billion, 12.5 per cent up on $11.01 billion last year. Earnings per share of 28 cents were 17.9 per cent up on 23 cents paid out for the first six months of last year, the company said. Chairman Peter Sutch said the disappointing results reflected continuing difficulties in the airline industry worldwide. ''The boycott of tours to China by Taiwan travel agents reduced passenger numbers in one of our most important markets in the second quarter, and led us to suspend 91 round-trip flights between Hong Kong and Taiwan,'' Mr Sutch said. ''Business to Europe remains weak, as indeed is the Hong Kong market.'' A dividend of 10.5 cents was announced, unchanged from last year. Net operating profit during the first half increased by 13.1 per cent to $839 million, from $742 million last year. Mr Sutch said that downward pressure on yields, over-capacity in the airline industry and continued inflation in Hong Kong remained serious challenges to Cathay. ''We are taking action to meet these challenges and to prepare ourselves for an eventual upturn,'' he said. According to the chairman, on-time performance was much improved and an increased focus on customer needs had led to several product enhancements. ''We are also identifying ways to increase productivity across the company,'' he said. ''The senior and middle-management structure has been streamlined, and flight-deck crews have accepted changes which will bring working practices more in line with those of our major competitors.'' According to Mr Sutch, Cathay's purchase of a 75 per cent stake in Air Hong Kong would benefit both companies in terms of cost efficiency and flexibility. He predicted better results in the second half of the year. ''The second half is normally better than the first, and I would expect that pattern to continue in 1994, although operating conditions will continue to be difficult,'' he said. ''Further ahead, there are some signs of economic recovery in some of our markets, notably Japan, but others remain soft.'' He said that it was encouraging to see the resumption of Sino-British talks on the financial arrangements for the new airport at Chek Lap Kok. Most analysts agreed the stock market would be disappointed with the results, because the company's financial fortunes had been expected to brighten thanks to the appreciation of the yen and the growing numbers of Japanese travelling in Asia. But Cathay's load factor on the Japan runs had increased by only one per cent, while tourist and business traffic had jumped by almost 25 per cent. The reason Cathay was not reaping the benefits of the increase in traffic was that Japanese travellers were becoming more sophisticated and opting for discount fares, analysts said.