Cathay Pacific has produced a dramatic turnaround in its financial results for 2018, providing the strongest evidence yet that its transformation plan is paying off.

The Hong Kong-based Cathay Group reported a net profit of HK$2.3 billion ($293 million) in 2018, reversed from a net loss of HK$1.3 billion in the previous year.

Impressive revenue and yield growth outstripped cost rises, driving the overall improvement. Cargo was stronger, and fuel hedging losses decreased. The 2018 profit had been signaled by earnings guidance issued last month.

Cathay’s dip into the red prompted the launch of its multiyear transformation plan in 2017. This included elements such as a dramatic reduction in headquarters staff and a new corporate structure, but it appeared that Cathay did not go as far as other restructuring airlines in the region. However, the latest results show the plan is working. Cathay noted that its transformation program “remains on track and had a positive impact” on its results. The program is continuing in 2019.

Cathay Chairman John Slosar said the airline focused on “finding new sources of revenue, building our network and strengthening the Hong Kong hub,” as well as improving efficiency. Capacity growth coupled with improved revenue management helped drive gains in the passenger division, Slosar said.

The airline faced a range of challenges in 2018, including a second-half increase in competitive pressure from the Mainland Chinese airlines in particular. Unfavorable exchange rate shifts were also a headache, as they have been for many Asian carriers.

Fuel costs were a major factor as usual. Cathay said prices rose for the first 10 months of the year, before falling off in the final two months. Total fuel costs—excluding hedging—rose by 31.1% in 2018. However, including lower hedging losses, the fuel cost increase was 8.9%. The carrier noted its fuel consumption rate declined by 1.3%, reflecting its improved fleet efficiency.

Passenger revenue was up 10.1% to HK$73.1 billion, on a 3.5% capacity increase. Passenger yield rose 6.7%, which Cathay attributed to stronger premium demand, higher fuel surcharges and its improved revenue management.

Cathay also reported “robust demand” in its cargo operation. Cargo revenue was up by 18.5%, with capacity increasing by 2.6%. Yield improved by 14.7%.

In terms of fleet, the Cathay group finished 2018 with 212 aircraft, including subsidiaries Cathay Dragon and Air Hong Kong. This was up by four compared to Dec. 31, 2017. The core Cathay fleet rose to 154 by the end of 2018, up by five year-on-year including deliveries and retirements.

Most of the fleet growth comprised Airbus A350-1000s. Cathay added its first eight of these in 2018, as well as two 777-300s. The airline is scheduled to add four -1000s in 2019, two of which have been delivered in the past two months. It is also expected to take delivery of two more A350-900s this year, and three used Boeing 777-300s.

Cathay Dragon is not scheduled to add any aircraft this year, but the first nine of its 32 A321neo orders are expected in 2020.

Adrian Schofield,