Asian airline Cathay Pacific has surprised the market with an increase in profits for the first half of the year and an optimistic outlook for the second.

Cathay, Asia's fourth-largest carrier, reported a 7% rise in profits - against expectations of a decrease - and said a recovery in the US economy had boosted its cargo business.

The Hong-Kong based airline said strong demand had meant planes grounded after September 11 were brought back into service.

The carrier's capacity will increase further this year with the delivery of new planes and potential acquisitions.

However, the company is still involved in a dispute with its pilots' union, and there remains the threat of more industrial action.

Faster turnaround than expected

Shares in Cathay Pacific were up over 10% by the close of the Hong Kong market, after it reported profits of 1.41bn Hong Kong dollars (�118m; $181m) against expectations of 462-900m Hong Kong dollars.

Airlines in the region may be performing better than their counterparts in Europe, and in particular those of the US.

Phillip Wickham, ING Barings

Chairman James Hughes-Hallett said the demand for business travel remained weak but was offset by a recovery in US manufacturing, which meant heavy export orders for the cargo division.

The company also benefited from a 20% reduction in fuel prices.

The turnaround cheered the market, particularly after Cathay reported an 87% plunge in profits in March, blaming the fall-out in business and first-class travellers.

Analyst Philip Wickham at ING Barings had expected a 65% drop in first half profits.

"Cathay's results certainly reflect the fact that airlines in the region may be performing better than their counterparts in Europe, and in particular those of the US," Mr Wickham said.

Increasing the load

Cathay Pacific said on Wednesday it was now considering buying further aircraft from maker Airbus within six to eight months.

We anticipate continued demand in the coming months and an improved result in the traditionally stronger second half

James Hughes-Hallett, Cathay Pacific chairman

Cathay has already ordered three long range aircraft for delivery by the end of this year, with six new regional planes to arrive by the end of 2003.

The chairman said the strong outlook followed a steady improvement in market conditions after the industry was battered by the September 11 terrorist attacks.

Mr Hughes-Mallett said on Wednesday: "Subject to unforeseen circumstances, we anticipate continued demand in the coming months and an improved result in the traditionally stronger second half."

Dispute also on the rise

However, Cathay's disagreement with its pilots continues.

The company's pilots union has threatened a further round of industrial action later this year which may disrupt flights.

The union represents most of Cathay's 1,600 pilots and is calling for discussion over pay and working hours.

The dispute has been going on since last July.