A proton exchange membrane (PEM) fuel cell with a hydrophobically treated cathode catalyst layer (CL) demonstrates ~220% peak power increase with humidified air at 70°C. To understand the reasons for the increase, a mathematical model was developed focusing on the oxygen-water two-phase transport phenomena. The model suggests the treatment affects the CL in two ways. First, the interface of the ionomer layer exposed to the gas pores becomes more hydrophobic, facilitating less coverage and faster water drainage from the CL and resulting in better performance at high current densities. Second, it also affects the hydration level in the ionomer phase resulting in higher oxygen concentration on and in the catalyst agglomerates, leading to higher performance over the whole polarization curve. The properties having significant influence on the model fitting the experimental data are the capillary pressure property of the CL, the hydrophobic ionomer ratio in the agglomerate, and the oxygen solubility/diffusivity in the Nafion® phases. With this experimentally verified model, additional case studies combining the hydrophobic gas diffusion material with the hydrophobic CL demonstrate that the membrane’s self-humidification (zero-net-water flux) and peak power enhancement (~15%) can be reached simultaneously, providing direction for the future materials development.