Cathay Pacific Airways expects continued stellar growth in passenger traffic in the coming months, but warned freight volumes will remain weak in the short term due to high oil prices.

"We are facing increased competition in a number of markets and many shippers are switching from air freight to marine transport due to the high price of fuel," chairman Christopher Pratt said after the company's annual general meeting on May 9, 2007.

Cathay Pacific and its wholly owned subsidiary, Dragonair, carried a combined 1.87 million passengers in March, up 2.7 percent from the same month last year, while cargo tonnage fell 2 percent to 140,002 tonnes.

Chief executive Philip Chen Nan-lok said Cathay Pacific has arranged hedging up to the 55 percent level in the second quarter, up to 45 percent level for the remainder of this year and 9 percent in 2008.

Hedging allows airlines to lock in fuel prices to protect against future hikes.

The carrier has also imposed cargo surcharges of HK$2.20 per kilogram for short-haul flights and HK$4.40 per kg for long-hauls.

Explaining the outlook for the airline's airfreight business, Chen said: "cargo is a very cyclical business. Cathay Pacific will see limited negative impact in the long term."

Pratt said the airline is "optimistic" about the third cargo terminal at Hong Kong International Airport and does not wish to see a further delay in its construction.

Meanwhile, Chicago-based United Airlines announced it is planning to inaugurate a direct daily flight between Hong Kong and Los Angeles by October, creating direct competition with Cathay Pacific on the trans-Pacific route.

The airlines already compete on the Hong Kong to San Francisco run.

Chen said the company is planning to increase its frequency on the Hong Kong-New York route and the Hong Kong-San Francisco route over the next few years.

In a recent research report, Merrill Lynch said it remains optimistic on the outlook for Cathay Pacific in 2007. "Earnings are primarily driven by the passenger business - particularly the booming long-haul and premium segments," analyst Paul Dewberry said.