China Merchants Securities (CMSC) released a research report stating that the trend of supply-demand recovery and profit rebound in the aviation industry is clear for the future. From a medium to long-term perspective, the sustained climb in industry profits will provide support for the restoration of market capitalization. In the short term, benefiting from demand growth and stabilizing/rising airfares, the Q4 off-season is expected to see a significant year-on-year reduction in losses, with 2025 likely being the first year major airlines return to profitability. The 2026 Spring Festival travel season is expected to benefit from demand growth and a year-on-year decline in jet fuel prices, achieving substantial year-on-year profit growth, making the full year of 2026 potentially the first year for major airlines to release significant profit elasticity. The main views of CMSC are as follows:
Review of the 2025 Industry: Supply and Demand Bottoming Out, Annual Domestic Base Airfares Basically Stop Falling (1) Driven by fleet size growth and utilization rate recovery, industry ASK increased by 6% year-on-year from January to November 2025, up 17.1% compared to the same period in 2019. As the utilization gap narrows, industry capacity growth is normalizing and gradually slowing down. (2) Benefiting from the rapid recovery of international routes, aviation demand maintained relatively fast growth in 2025. From January to November 2025, national civil aviation passenger traffic volume increased 8.3% year-on-year, up 19.6% compared to the same period in 2019. Domestic route passenger traffic volume increased 4.5% compared to 2024 and 25.5% compared to 2019; international route passenger traffic volume surged 22.9% compared to 2024 and 3.6% compared to 2019. (3) Benefiting from demand growth, industry load factors continued to reach new highs in 2025. The average national civil aviation load factor for January-November 2025 was 85.2%, up 1.8 percentage points year-on-year and also 1.8 percentage points higher than the same period in 2019. (4) Peak season fares faced year-on-year pressure in 2025, while the off-season, benefiting from concentrated release of private travel demand and a low base, saw stronger year-on-year fare performance than the peak season. Annually, domestic base airfares basically stopped falling, with Q4 expected to achieve growth in both base fares and fuel-inclusive fares. According to Flight Master data, for the first 50 weeks of 2025 (2025/1/3~2025/12/18), the average domestic base fare was 704 yuan, down 1.8% year-on-year compared to 2024; the average fuel-inclusive fare was 717 yuan, down 5.5% year-on-year compared to 2024. Since Q4, base fares have increased 2.9% year-on-year and fuel-inclusive fares have increased 2.5% year-on-year. The year-on-year turnaround in Q4 fares indicates a quarterly supply-demand reversal against the backdrop of rapid demand growth.
Future Outlook: Supply-Demand Reversal, Improving Fuel and Forex Conditions (1) Supply Side: Based on assumptions for aircraft delivery growth rates and aircraft utilization hour growth, the entire industry's supply is expected to have a compound annual growth rate (CAGR) of 5.2% from 2025 to 2027. (2) Demand Side: Integrating assumptions for domestic and international demand, the entire industry's demand is expected to have a CAGR of over 6.6% from 2025 to 2027. Considering both supply and demand, the industry's supply-demand relationship is expected to continuously improve from 2025 to 2027, driving the recovery of industry yield levels and profitability. (3) Looking ahead to 2026, benefiting from increased crude oil production and progress in Russia-Ukraine peace talks, crude oil prices are expected to decline further. Simultaneously, the Renminbi is expected to continue its moderate appreciation trend, contributing to profit improvement.
The trend of industry supply-demand recovery and profit rebound from 2025 to 2027 is clear, with a definite medium-term upward trajectory. On the demand side, the industry is in a post-pandemic recovery phase, with travel consumption demand showing some resilience. Economic stabilization and consumption stimulus policies favor domestic travel demand growth, while visa-waiver policies are expected to accelerate the recovery of international route demand. On the supply side, affected by global aircraft supply chain disruptions, supply release remains tight. The civil aviation fleet size is expected to maintain steady growth, with supply growth rates continuing to slow, leading to improved supply-demand dynamics. Regarding fuel and forex factors, with the progression of OPEC+ production increases, oil prices are expected to continue their year-on-year decline, directly reducing costs and benefiting demand recovery and profit growth. Concurrently, the Renminbi is anticipated to maintain an appreciation trend in 2026, further driving profit improvement. The overarching trend of industry supply-demand recovery and profit rebound is unequivocal.
From a medium to long-term perspective, the sustained upward climb in industry profits will provide fundamental support for the restoration of market capitalization. In the immediate term, Q4 is benefiting from demand growth and stabilizing/rising airfares, with the off-season poised for a substantial year-on-year reduction in losses. The year 2025 holds promise as the inaugural year for major airlines to return to profitability. The 2026 Spring Festival travel rush is expected to capitalize on demand growth and lower year-on-year jet fuel prices, achieving significant profit expansion. Consequently, the entirety of 2026 could mark the first year where major airlines fully demonstrate their profit elasticity.
Risk warnings: Macroeconomic growth falling short of expectations; Supply growth exceeding expectations; Recovery of international routes lagging behind expectations; Sharp rise in oil prices; Significant depreciation of the Renminbi.
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