GLMS SEC released a research report stating that April will see a "stress test" for domestic airfare increases, with the medium-term focus being on a potential turning point in oil prices and the overall price level. Domestic jet fuel procurement prices are adjusted with a one-month lag. A fuel surcharge adjustment follows five days after a jet fuel price increase on the first of each month. Following the April fuel surcharge hike, domestic airfares will face a "stress test" as airlines assess downstream price acceptance during the sales process. From a positive perspective, price increases driven by higher oil prices represent an industry-wide pricing test. If demand responds favorably, a subsequent decline in oil prices could help alleviate price competition among carriers. However, the risk is demand's sensitivity to price. Airlines may face a difficult choice between passenger volume and ticket price, potentially bearing more pressure from rising oil costs.
The escalation of conflict in the Middle East has led to increased volatility, with Singapore jet fuel prices exceeding $200 per barrel, significantly impacting airline operating costs. In early March 2026, heightened geopolitical tensions between the US and Iran reduced transport efficiency through the Strait of Hormuz. Tight supply of crude oil and refined products in the Asia-Pacific region drove prices upward, pushing Brent crude above $100 per barrel and Singapore jet fuel free-on-board export prices above $200 per barrel. Fuel cost is the largest expense for airlines, constituting approximately 30% of total revenue for Chinese carriers. Sustained high oil prices have a substantial impact on airline profitability.
How does rising crude oil price translate into higher fuel costs for airlines? Airline jet fuel procurement prices are linked to the Singapore jet fuel FOB price, which in turn is connected to crude oil prices. China is a major producer and consumer of jet fuel. While the crude oil required for production is imported, jet fuel for airline operations is supplied self-sufficiently through the domestic refinery system, creating an industrial structure where "costs are external, but demand is internal." Domestic jet fuel is processed by refineries of the major state-owned oil companies. China National Aviation Fuel handles transportation, storage, and supply to airlines at domestic airports. Singapore serves as a key refining and trading hub for jet fuel in the Asia-Pacific region. Its jet fuel export settlement price effectively reflects crude oil costs and reasonable refinery margins. Consequently, after multiple rounds of reform, China's jet fuel pricing is anchored to the Singapore jet fuel FOB price, balancing domestic refinery profits with reasonable fuel costs for airlines.
To what extent does the fuel surcharge cover the incremental fuel cost? The surcharge amount covers approximately 45-60% of the incremental cost, with net coverage estimated at around 20-30%. The fuel surcharge mechanism aims to distribute the oil price increase across ticket prices based on passenger volume. China's fuel surcharge pricing is linked to fuel consumption per ton-kilometer, flight distance (calculated as 800 km for flights under 800 km and 1500 km for longer flights), and jet fuel price (triggered when the domestic jet fuel price per ton exceeds 5,000 yuan). The actual coverage of incremental costs by the surcharge depends on downstream price feedback. Transferring the oil price increase to consumers via a surcharge is essentially a form of downstream taxation, which can cause demand contraction and crowd out some travelers. Under the current domestic fuel surcharge mechanism, the surcharge amount can cover 45-60% of the incremental cost. Airlines with larger aircraft, higher load factors, and greater fuel efficiency have stronger coverage capabilities. In practice, due to limited downstream price pass-through, airlines must balance the trade-off between potential passenger volume decline and the increase in the total ticket price including the surcharge. It is estimated that the net coverage ratio of the surcharge against the incremental cost is approximately 20-30%.
Risk warnings include further escalation of geopolitical conflicts, a significant surge in oil prices, potential deviations in calculations, and fluctuations in the RMB exchange rate.
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