Cathay Pacific Faces Headwinds: How US-China Tariffs Are Shaping Air Cargo Demand in 2025

The escalating US-China trade war has cast a shadow over global air cargo markets, and Cathay Pacific (0293.HK) finds itself at the epicenter. The airline’s recent guidance of lower US-China air cargo demand in 2025, driven by punitive tariffs and regulatory changes, underscores the precarious balance between geopolitical forces and corporate resilience. Let’s dissect the implications for investors.

The Tariff Escalation: A Perfect Storm for Cargo Demand

The first quarter of 2025 marked a dramatic escalation in US-China trade tensions. By March, US tariffs on Chinese goods had reached 20%, with reciprocal Chinese tariffs hitting 15% on agricultural exports and 10% on energy products. These measures, coupled with the suspension of the "de minimis" exemption (effective May 2, 2025), have sent shockwaves through supply chains. The exemption, which previously allowed duty-free entry for shipments under $800, was a lifeline for e-commerce giants like Shein and Temu—now forced to absorb added costs or reroute shipments.

Data shows that trans-Pacific cargo demand could decline by 10–15% in 2025 compared to 2024, as businesses adopt "just-in-case" inventory strategies and diversify supply chains. Analysts estimate tariff-driven operational costs for carriers like Cathay could rise by 20–30%, squeezing margins unless passed on to shippers.

Cathay’s Strategic Response: Redeploying Assets and Betting on Resilience

Cathay has already begun adjusting its strategy to mitigate the fallout:
1. Route Diversification: The airline is shifting freighter capacity to high-demand routes like Anchorage to Miami and Hong Kong to Europe, leveraging its partnership with NorthLink Aviation. This collaboration, secured in late 2024, grants exclusive access to Anchorage’s infrastructure, critical for winter resilience and trans-Pacific connectivity.
2. Sustainability and Tech Investments: Cathay’s $3 billion fleet modernization plan—featuring six Airbus A350 freighters by 2027—aims to reduce fuel consumption and carbon emissions. Meanwhile, AI-driven cargo routing systems and API integrations with freight forwarders (e.g., DHL, DB Schenker) are streamlining operations.
3. Margin Buffering: The airline has built a 3–5% margin buffer into its 2025 financial forecasts to absorb tariff-related shocks, signaling cautious optimism.

Cathay’s shares have underperformed regional rivals like Singapore Airlines (SIA.SI) and Emirates (EMIRA.UL) since early 2025, reflecting investor anxiety over trade uncertainty. However, its strategic moves—such as the Anchorage deal and tech upgrades—could pay dividends as markets stabilize.

Market Implications: Winners and Losers in the New Cargo Landscape

The tariffs are reshaping the air cargo sector’s dynamics:
- Winners:
- Diversified Carriers: Airlines with robust global networks (e.g., FedEx, UPS) are less reliant on any single route.
- E-Commerce Logistics: Companies like DHL and Flexport, which offer tariff-avoidance solutions, are seeing surging demand.
- Losers:
- Tariff-Heavy Routes: US-China cargo volumes are projected to fall to pre-pandemic levels by mid-2025.
- Low-Margin Shippers: Businesses unable to pass on tariff costs face margin compression, potentially reducing demand for premium airfreight.

Conclusion: Navigating the Storm with a Long-Term Lens

While Cathay Pacific faces near-term headwinds, its adaptive strategy positions it to capitalize on post-tariff recovery. Key data points reinforce this outlook:
1. Demand Resilience: Despite tariff pressures, time-sensitive cargo (e.g., pharmaceuticals, perishables) remains inelastic, with 2025 global air cargo demand expected to grow 5.8% (IATA).
2. Infrastructure Payoffs: The Anchorage hub could boost Cathay’s trans-Pacific efficiency by 15–20%, reducing weather-related disruptions.
3. Valuation: At 6.2x 2025E EV/EBITDA, Cathay trades at a discount to its pre-pandemic valuation, offering a potential rebound opportunity if trade tensions ease.

Investors should monitor two critical indicators:
- US-China Trade Talks: Progress toward a truce could trigger a 20–30% surge in trans-Pacific cargo volumes.
- Cathay’s Q2 2025 Results: Margins and cargo yield data will signal whether its cost controls and route shifts are effective.

In a sector where adaptability is key, Cathay’s blend of strategic pivots and long-term investments makes it a hold with upside potential if trade winds shift. As one analyst noted, “Air cargo is still the fastest way to move high-value goods—it just needs a path to profitability.” For now, that path runs through Anchorage.