According to a research report from Guotai Haitong, airline fuel costs account for approximately 35% of total expenses, indicating that profitability is significantly impacted in static calculations. However, the actual effect depends on supply-demand dynamics. China's aviation supply has entered an era of low growth, while demand stands to benefit substantially from policies aimed at boosting consumption. Continued favorable supply-demand conditions are expected to mitigate the impact of oil price increases more than current concerns suggest. On domestic routes, fuel surcharges will be imposed, covering a large portion of the rise in oil prices. Improved supply-demand dynamics will further facilitate the pass-through of these costs. For international routes, disruptions to key hubs like Dubai and Doha due to Middle East conflicts have led to significant fare increases on China-Europe routes, benefiting from both domestic and international transit traffic. This will partially offset the impact of higher oil prices. The report recommends seizing the rare opportunity presented by geopolitical oil price movements to strategically position for the aviation super-cycle, prioritizing carriers with high-quality route networks. Key insights from Guotai Haitong are as follows:
Emphasizing the long-term logic of China's aviation sector, a "super-cycle" is beginning. Demand in China's aviation market has substantial long-term potential, coupled with a rare long-term supply constraint in a cyclical industry. During the 12th Five-Year Plan period, airspace and slot bottlenecks became prominent and persistent. In the 13th Five-Year Plan period, the Civil Aviation Administration of China strictly controlled slot growth and accelerated fare marketization. By the 14th Five-Year Plan period, fare marketization was largely achieved, and fleet growth slowed significantly. This implies that once supply and demand recover, trunk routes will unleash pricing power that had long been suppressed, while the negative impact of overcapacity in third- and fourth-tier cities has diminished. As a result, China's aviation industry is poised for a sustainable "super-cycle" with a significantly higher and more stable profit base. At the start of the 15th Five-Year Plan period, aviation supply has entered a low-growth era, demand will continue to grow steadily, and load factors are already among the highest globally. Future improvements in supply-demand conditions will drive the onset of this super-cycle. In 2025, fares have already begun to rise, and Q3 profits have exceeded 2019 levels for three consecutive years. In Q1 2026, lower oil prices and rising fares reflect a healthy supply-demand recovery. Importantly, geopolitical oil price fluctuations do not alter the long-term logic of the super-cycle.
On the supply side, internal and external factors converge, leading to an era of low growth. Before 2019, China's civil aviation fleet grew at over 10% annually. However, airspace and slot bottlenecks became a significant drag on airline profitability. During the 14th Five-Year Plan period, fleet growth slowed markedly, with an estimated industry-wide compound annual growth rate of about 3.2%, and only 2.7% for A-share listed airlines. Beyond external factors like aircraft manufacturing capacity, a more critical internal factor is airlines' reduced willingness for capital expenditure. 1) Internal factors: Airlines expect long-term airspace and slot constraints to persist, resulting in low returns on new aircraft. This rational reluctance to increase capital expenditure during the 14th Five-Year Plan period is expected to continue into the 15th Five-Year Plan period. 2) External factors: Supply chain recovery has been slow due to pandemic and geopolitical disruptions in recent years, compounded by durability issues with new-generation aircraft engines. While manufacturing capacity may gradually recover in the coming years, it will not alter the trend of low fleet growth.
On the demand side, the demographic dividend in aviation continues, supported by consumption-boosting policies that ensure growth. Air travel consumption in China remains in its early stages, with low penetration and frequency indicating substantial long-term potential. Over the past two decades, the long-term growth rate of aviation demand (volume × price) has consistently exceeded GDP growth. From 2023 to 2025, aviation demand recovered rapidly and returned to a steady growth trajectory. Looking ahead to the 15th Five-Year Plan period, the aviation demographic dividend will persist, further benefiting from national policies aimed at stimulating consumption. 1) Business travel: As the core profit source for airlines, primarily driven by the post-80s generation, travel frequency has remained stable over the past two years. It is expected that the impact of corporate travel expense controls has been fully absorbed, with steady growth likely to resume. 2) Leisure travel: Demand has been robust in recent years, with family travel being a key driver. The mini-baby boom from the 2010s will sustain strong family travel demand, and the promotion of spring and autumn holidays will further support growth. 3) International travel: Policies such as visa exemptions for multiple countries and efforts to encourage inbound tourism will continue to boost international demand and hub development.
Risks include geopolitical oil price volatility, economic fluctuations, policy changes, equity dilution from additional share issuances, and safety incidents.
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