Guotai Haitong Securities has released a research report stating that intense internal competition within the airline industry in 2025 led to high load factors but low ticket prices, impacting the recovery of profitability. The better-than-expected profit in Q1 2026 reflects a sound recovery in supply and demand. The report predicts the impact of geopolitical oil prices will be significantly less than feared and reiterates the opportunity for a contrarian strategy based on the "super cycle," recommending an overweight position in airlines.
In 2025, while supply and demand showed a sound phased recovery, intense internal competition resulted in high load factors and low ticket prices, hampering the profit recovery. Although the industry's pre-tax profit grew, the recovery in net profit was slower than anticipated. Key observations for 2025 include: 1) A large portion of fuel cost savings during the low seasons of Q2 and September were retained, indicating a good phased recovery in supply and demand; 2) Despite an unexpected weakening of commercial demand during the Q3 peak season, industry profits still showed a slight year-on-year increase against the trend and exceeded Q3 2019 levels for the third consecutive year, revealing significant profit potential; 3) Visa-free policy benefits continued to drive high growth in international passenger traffic, with improved passenger demographics on China-Europe routes contributing to notable fare increases and profits; 4) Airlines continued to prioritize load factors, leading to intense competition that pushed load factors up by 1.8 percentage points to a new high. However, low-price competition partly eroded the reasonable pricing power afforded by the supply-demand recovery. Domestic airfares failed to recover as targeted at the start of the year and continued to decline, remaining significantly below 2019 levels.
For Q1 2026, lower oil prices and rising ticket prices are expected to lead to industry profits exceeding expectations, more importantly reflecting a sound recovery in supply and demand. Estimated industry passenger volume grew 6% year-on-year; load factors increased by nearly 2 percentage points; and domestic fares including fuel surcharges rose over 5% year-on-year. Strong demand during the Spring Festival travel period, a rapid recovery in commercial traffic during the March low season, and better-than-usual exhibition activity contributed to fare increases surpassing prior forecasts. The average domestic jet fuel price in Q1 fell 8% year-on-year, while fares rose significantly, meaning all fuel cost savings were retained as profit, with a further notable improvement in gross margins. Furthermore, high load factors and substantial fare increases on China-Europe routes since March are expected to drive significant profit growth on these routes. Industry profit for Q1 is projected to exceed expectations, with airlines having a high proportion of European routes likely to report notably strong, above-forecast profits. Crucially, the Q1 profit performance signifies that after three years of gradual recovery, the airline industry's supply and demand had returned to a sound state by 2026.
The actual impact of geopolitical oil prices is expected to be significantly less than concerns suggest. 1) The transmission of international oil prices to the domestic market since April 2026 has been moderated by NDRC controls that limit the increase in domestic jet fuel prices and ensure supply, alleviating cost pressure on airlines and significantly enhancing the competitiveness of international routes. 2) On domestic routes, the imposition of fuel surcharges and market-based fare mechanisms provide ample room for base fare increases. Improving supply-demand dynamics and efforts to reduce internal competition will aid the effective pass-through of costs. Recent base fare increases of over 100 yuan suggest domestic fares including surcharges have risen more than 20% year-on-year, which is expected to cover a large portion of the oil price increase. Recent limited declines in passenger traffic and flight cancellations, coupled with sustained high load factors, if maintained, could lead to a better-than-expected pass-through of oil price pressures. 3) On international routes, Middle East conflicts have significantly impacted operations at major Asia-Europe hubs like Dubai, Doha, and Abu Dhabi. China-Europe routes have benefited from redirected domestic and new international transit traffic, with load factors soaring to over 90% since March and fares multiplying.
The report reiterates the contrarian opportunity presented by geopolitical oil prices to strategically position for the "super cycle" and recommends overweighting airlines. With market-based fare mechanisms and slower fleet growth during the "14th Five-Year Plan" period, and continued airspace bottlenecks and strict slot control during the "15th Five-Year Plan" period, China's load factors are already among the highest globally. As supply enters a period of low growth and demand benefits from consumption stimulus, continued positive supply-demand dynamics and deeper anti-competition efforts will ensure the short-term oil price impact is significantly less than feared. This is expected to drive significant, sustainable profit growth for years to come. Geopolitical oil prices do not alter the long-term logic of the "super cycle" and provide a rare contrarian opportunity. Selecting airlines with high-quality route networks, strong passenger bases, and a high proportion of European routes is advised.
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