The decline spooked the market, causing Cathay shares to tumble 7.3 per cent to a two-month low of HK$11.92 in Hong Kong trading. The airline’s shares have declined almost 27 per cent in the past 12 months.

Passengers had been paying lower fares, even though Cathay’s passenger traffic rose during the six months, causing first-half revenue to slide 9.3 per cent to HK$45.68 billion.

The passenger yield, or the average fare paid per kilometre flown by each passenger, plunged 10.1 per cent, more than offsetting a 2.6 per cent rise in passenger traffic during the period.

Profit was also weighed by declining passenger load factor - the proportion of airline output utilised - which fell to 84.5 per cent from 85.9 per cent.

Cathay’s cargo-carrying business didn’t help, weighed down by a Chinese economy that’s been expanding at its slowest clip in decades. Cargo yield fell 17.6 per cent, while the cargo traffic declined 2.3 per cent.

The figures were much worse than what UOB Kay Hian’s analysts were expecting.

Cathay’s passenger yield was expected to have declined 6.5 per cent over the period, while cargo yield was expected to have dropped 12 per cent, according to UOB Kay Hian. They had forecasted a 40 per cent net profit decline.

Every percentage point fall in passenger yield cuts Cathay’s pre-tax profit by HK$347 million, while each percentage point decline in cargo yield squeezes profit by HK$85 million, according to UOB Kay Hian’s calculations.

The airline reported a HK$4.49 billion loss from placing wrong-way bets on fuel prices. Up to 63 per cent of Cathay’s 2016 jet fuel demand was locked in at US$85 a barrel, 51 per cent of 2017 needs were hedged at US$89.5 a barrel, while 44 per cent of 2018 requirements were locked in at US$80.5 a barrel, according to finance director Martin Murray. Brent crude now trades at about US$48.57 a barrel.

Cathay’s second-half financial prospects aren’t expected to improve because of increasing costs, and yields that remain weak, analysts said.

“We see little reason to be optimistic,” UOB Kay Hian said in a report before the airline reported its results. “Cathay faces substantial competition from Chinese carriers on North American and southwest Pacific routes, which collectively account for 40 per cent” of Cathay’s passenger capacity, according to the report.

Daiwa Capital Markets’ analyst Kelvin Lau concurred.

“We expect no near-term recovery for Cathay’s load and yield and believe 2016 will be another tough year,” he wrote in a note.

Cathay’s chairman John Slosar said as much.

“We expect the operating environment in the second half of the year to continue to be impacted by the same adverse factors as in the first half,” he said. “We expect passenger yield to remain under pressure. Overcapacity and economic fragility will dampen cargo demand.”

Maybank Kim Eng analyst Mohshin Aziz said Cathay’s costs will increase after a 17 per cent hike in aircraft landing and parking charges at Hong Kong’s airport from next month, and the imposition of departure or transit fees for passengers, to fund the airport’s expansion.

Chief executive Ivan Chu said the firm has delayed the delivery of some new aircraft so that its fleet capacity expansion will slow to 3.1 per cent for the whole of this year from 4.8 per cent last year. It expanded 4.2 per cent in this year’s first half.

The company will work on cost control and operational efficiency improvement as it remains banned from putting fuel surcharges on air tickets, while lower fuel prices will continue to be partially offset by fuel hedging losses, he added.

Slosar said he expected the gloomy situation will “not last forever and will work itself out.”