CITIC SEC's research report indicates that the recent sharp increase in oil prices has significantly widened the profitability gap among airlines. For the first three weeks of April and May, the average full ticket price for domestic routes increased by 17.0% and 12.7% year-on-year to RMB 900 and RMB 916, respectively. This double-digit growth in domestic fares has created room for pricing flexibility. Should oil prices stabilize and subsequently decline, leading to a reduction in fuel surcharges, the base fare is expected to absorb some of the space created by the surcharge reduction.
The early summer travel season was impacted by short-term disruptions. However, after adjusting for typhoon-related weather effects, traffic growth has shown a sequential recovery. The latter half of July may serve as a crucial window to verify demand resilience and fare improvements. The aviation cycle is merely delayed, not absent. Considering the strong constraints on aircraft deliveries and slot capacity expansion over the next two years, there is anticipation for a convergence where jet fuel cost pressures ease and base fare increases take effect, ultimately translating into quarterly profits. It is advisable to monitor the valuation recovery in the aviation sector, driven by stabilizing oil prices, the inflection point for summer traffic and fares, and the sustained strength of international routes.
Oil Price Surge and Fare Flexibility
The sharp rise in oil prices has pushed industry-wide full ticket prices to new highs, creating potential for future flexibility. The pressure from high oil prices on airline costs is primarily evident in Q2 2026. Based on preliminary financial results, carriers like China Express Airlines, Juneyao Air, China Southern Airlines, and China Eastern Airlines reported estimated net losses ranging from RMB 0.8-1.0 billion, RMB 2.3-3.0 billion, RMB 49.5-54.5 billion, and RMB 34.3-40.3 billion, respectively, for the quarter. The impact of geopolitically-driven high oil prices is expected to dissipate, with multiple factors converging for a potential cycle upswing. In the first two weeks of the summer season, a rapid recovery in flight reductions led to a year-on-year double-digit decline in domestic base fares. It is anticipated that the phase of significant supply-side expansion is nearing its end, with the latter half of July potentially being a key period to observe domestic summer demand. The cycle is delayed but not absent. Domestic passenger traffic turned positive year-on-year in the week starting July 6th, raising expectations for a subsequent release of the aviation prosperity cycle's potential, driven by a return of jet fuel prices to normal levels and fare elasticity.
Tight Supply from Fleet and Slot Constraints
The aviation cycle awaits a demand tailwind, constrained by both fleet introductions and slot capacity expansion. High aircraft lease rates, inspections required for PW1100G engines, and the Leap engine gradually entering its maintenance cycle have further limited airlines' effective capacity. Simultaneously, strict slot control serves as a fundamental measure by the aviation authority to curb excessive competition. Since 2023, domestic slot allocations have shown consecutive year-on-year declines during winter-spring seasons. For the 2025 winter-spring and 2026 summer-autumn seasons, domestic slots are projected to change by -1.8% and -2.8% year-on-year, respectively. Tight supply control and structural optimization are expected to drive higher-quality yield growth. Based on a comprehensive analysis of supply and demand factors, the estimated compound annual growth rate difference between demand and supply relative to 2015 is projected at 0.5%, 0.6%, and 0.7% over the next three years. Against a backdrop of a widening supply-demand growth gap, the impact of marginal changes in demand is likely to be amplified.
Summer Demand Inflection and Q3 Performance Outlook
An initial inflection point in summer traffic volume has emerged on the demand side, with accumulating positive signals pointing towards potential fare elasticity. However, performance divergence among airlines may persist in Q3 2026. High oil prices and typhoon disruptions initially suppressed traffic volume and fares in the early peak summer season. Cumulative flight volume for the first 14 days of the summer period declined 2.2% year-on-year. Yet, excluding disruptions from typhoons on July 11th and 12th, cumulative flight volume was roughly flat year-on-year, indicating a gradual recovery from earlier flight reductions. Coupled with the fuel surcharge reduction effective from July 5th, the latter half of July may become a significant observation window for peak season demand release and improvements in volume and pricing. For Q3 2026, while repeated engagements between involved parties have led to a better understanding of intentions and boundaries, a return of jet fuel prices to 2025 levels may still require time. With oil prices remaining relatively elevated, performance divergence among airlines is likely to continue in Q3. Business models characterized by specific operational and financial structures, combined with a shift towards more granular cost management, can amplify a carrier's cost leadership advantage.
Sustained Strength in International Routes
International routes maintain robust performance, with focus on peak season demand release following oil price stabilization. Differences in fare elasticity, coupled with cost increments from route diversions due to geopolitical conflicts, have led foreign carriers to allocate more capacity to transatlantic routes. Chinese airlines' market share on China-Europe routes increased by 21.5 percentage points to 74.1% in 2025 compared to 2019. Geopolitical tensions may further narrow the airspace for foreign carriers on Europe-Far East routes to a narrow corridor over Georgia-Azerbaijan, potentially allowing Chinese carriers to increase their market share on European routes in the short term. Against a backdrop of high load factors, revenue per available seat kilometer is expected to achieve roughly double-digit growth. On the demand side, positive catalysts such as visa-free policies and event-related tourism continue. According to the National Immigration Administration, visa-free foreign passenger arrivals grew 30.6% year-on-year in H1 2026, accounting for 77.8% of total inbound foreign passengers. Long-haul route demand demonstrates greater resilience, potentially bringing structural improvement and quality enhancement to airline earnings. Long-haul, high-yield routes like China-Europe are expected to maintain fare elasticity support amid improving supply-demand dynamics. Concurrently, sustained demand for short and medium-haul outbound travel, such as to Southeast Asia, is likely to solidify the foundation for international passenger traffic, jointly contributing to improved profitability quality on international routes.
Risk Factors
Key risks include aircraft delivery speeds exceeding expectations, oil price volatility exceeding forecasts, geopolitical events having a greater-than-anticipated impact, and a depreciation of the Renminbi beyond expectations.
Comments