Cathay Pacific losses narrow on higher air fares, sees better H2

* Posts loss of HK$263 million for H1 2018; costs rise

* Shares drop as much as 3.3 percent to lowest since December

* Forecasts stronger second-half performance (Adds CEO comments)

By Brenda Goh and Jamie Freed

SHANGHAI/SINGAPORE, Aug 8 (Reuters) - Cathay Pacific Airways Ltd posted a narrower half-year loss on a strong rise in airfares and cargo rates and flagged expectations for a better second half, although its failure to curb costs fuelled market concerns.

Shares of the Hong Kong airline fell 3.3 percent to their lowest in almost eight months after results showed expenses offset a better-than-expected rise in yields and higher revenue, casting a shadow on Cathay's three-year turnaround plan.

The airline is halfway through its turnaround schedule that has been designed to cut costs and increase revenue, after back-to-back years of losses, to allow it to better compete against rivals from the Middle East, mainland China and budget airlines.

Cathay has reduced jobs, invested in product improvements such as better business class meals and new Airbus SE A350 jets and is adding more economy seats to older Boeing Co 777s in a bid to boost business.

As a result of its measures, Cathay's costs have spiked, CEO Rupert Hogg said, adding external factors like higher oil prices had also contributed to the expenses.

"We are focusing on unit costs," Hogg told reporters. "Ultimately we were targeting to get to a sustainable financial position in 2019 and we are on track for that at the moment."

In a sign its efforts are paying off, Cathay's revenue grew 15.7 percent to HK$53.1 billion ($6.76 billion) in the first half ended June, while regional rival Singapore Airlines Ltd saw a 0.5 percent drop over April to June.

Cathay added 3.2 percent capacity over the six months to June, but in-flight service and passenger expenses rose by 8.8 percent, outpacing a 7.6 percent rise in yields or passenger fares. Fuel costs and airport charges also rose.

"The first half saw opposing performance; revenue was stronger than expected but costs went up," CAPA Centre for Aviation Senior Analyst Will Horton said.

"The restructuring was not going to give a linear decrease in costs, but the first half's cost increase was unwelcome."

SEES STRONGER H2, AS USUAL

Cathay Chairman John Slosar said while a stronger U.S. dollar and economic uncertainty arising from mounting global trade tensions remain challenges, the airline expects a better second-half performance, as is usual.

The company expects "passenger yields to continue to improve and the cargo business to remain strong", Slosar said.

Cargo yields rose by 16.3 percent in the first half.

Chief Customer and Commercial Officer Paul Loo said a U.S.-China trade spat had not yet hurt business but the airline was keeping an eye on the situation in case trading volumes shifted.

Cathay is expected to swing to a HK$1.2 billion profit for 2018, according to the average of 17 analysts polled by Thomson Reuters I/B/E/S, as out-of-the-money fuel hedges roll off.

For the first half of 2018, Cathay reported a HK$263 million loss and declared an interim dividend of HK$0.10, after not paying one last year. In 2017, it posted its worst January-June loss in at least 20 years of HK$2.05 billion.

Cathay shares ended down 1.8 percent at HK$11.86 on Wednesday, off its intraday low of HK$11.68 - the weakest since December, in a wider market that closed up 0.4 percent. ($1 = 7.8497 Hong Kong dollars) (Reporting by Brenda Goh in Shanghai and Jamie Freed in Singapore; additional reporting by Timothy Chan and Trista Shi in Hong Kong Editing by Himani Sarkar)