According to a recent research report, the most critical investment thesis for airlines in the second half of 2026 is that the market has largely priced in the impact of high oil prices, but has not yet fully accounted for the potential earnings rebound once oil prices ease or the pricing power from a tight supply-demand balance. Should oil prices trend lower, the sector could swiftly transition from "suppressed profitability" to "realized profit expansion." Conversely, if oil prices remain elevated, carriers with lower cost structures, higher proportions of international routes, and stronger fuel cost pass-through capabilities are expected to outperform.
Sinolink Securities Co., Ltd. (ASX: N/A) maintains that in the short term, oil prices continue to set the upper limit for stock price appreciation. Looking to the medium term, a combination of persistent supply constraints, high load factors, market-based ticket pricing, and an upward shift in the price anchor set by high-speed rail suggests the industry's profit trajectory is very likely on a sustained upward path. Key points from the report are outlined below.
Oil Price Pressure Expected to Ease in H2 2026; Sector Momentum Tied to Strait Dynamics and Oil Price Shifts
Airlines' second-quarter earnings are anticipated to show a significant decline due to oil price impacts. Influenced by Middle East tensions, Brent crude surged from a January average of $65 per barrel to briefly exceed $115. Concurrently, the import duty-paid price for jet fuel in China doubled, rising from an early-year average of 5,500 yuan per ton to 11,525 yuan in May. Although it retreated to 9,768 yuan in June, it remained at an elevated level. In response to high fuel costs, fuel surcharges for routes over 800 kilometers increased from 120 yuan to 170 yuan in May, before being adjusted down to 150 yuan in June. The report also notes that airlines began reducing flight frequencies starting in April due to cost pressures, with takeoffs and landings from June 4-10 down 10.3% year-over-year. These factors are projected to lead to a substantial drop in Q2 airline profits.
Oil price pressures showed further signs of easing in July, while airline valuations based on market value per aircraft have plummeted to extremely low percentiles. Following the signing of a U.S.-Iran memorandum of understanding, Brent futures settled at $73.74 per barrel on June 24, marking a 37.7% drop from the March peak and returning to pre-conflict levels. Given the one-month lag in China's domestic jet fuel price adjustments, the report estimates the July import price will decline further, offering significant relief from fuel cost pressures. From a valuation perspective, the airline sector experienced heavy selling in March and April, largely digesting the negative impact of high oil prices. Current market values per aircraft for major carriers have fallen to historic lows: Juneyao Airlines Co., Ltd. (SHSE: 603885) at the 1st percentile, China Express Airlines Co., Ltd. (SHE: 002928) at the 7th, Spring Airlines Co., Ltd. (SHSE: 601021) at the 10th, with Air China Limited (SHSE: 601111), China Southern Airlines Company Limited (SHSE: 600029), and China Eastern Airlines Corporation Limited (SHSE: 600115) at the 12th, 20th, and 37th percentiles, respectively. The report suggests that future developments regarding the Taiwan Strait and marginal changes in oil prices will be key determinants of the sector's performance trajectory.
Supply Constraints Remain the Core Medium-Term Driver for the Sector
The most significant medium-term variable for the current aviation cycle continues to be supply constraints. Key factors include: (1) Upstream delivery challenges: By the end of 2025, the global aircraft delivery backlog exceeded 5,000 units, with combined order backlogs at Boeing and Airbus surpassing 17,000 aircraft, nearly 60% of the active global fleet (this ratio was stable at 30-40% pre-2019). (2) Extended delivery cycles: The wait time for aircraft delivery lengthened from about 4 years in 2018 to 6 years by 2025. (3) Engine bottlenecks: Catalyzed by the Pratt & Whitney engine fire incident, 35% of global aircraft equipped with PW1100G engines were grounded. By the end of October 2025, 835 aircraft globally were idled due to "powder metal" issues with Pratt & Whitney GTF engines, with typical grounding periods exceeding 300 days. (4) Fleet aging: By the end of 2025, approximately 983 aircraft in China were over 13 years old (23% of the fleet), a figure expected to exceed 18 years by the end of the 15th Five-Year Plan period, with many likely retiring during that timeframe.
Favorable Conditions for Future Airfare Improvements
Demand is forecast to continue outpacing supply in 2026, with load factors at record highs. Coupled with a recent fare increase on the Beijing-Shanghai high-speed rail line, there is considerable room for improvement in airline ticket prices. The report projects effective aircraft supply growth for listed carriers at 2.5%, 6.2%, and 4.6% for 2026-2028, respectively, against passenger traffic growth of 5% annually. This indicates demand will exceed supply again in 2026. Industry load factors maintained a record high of 86% from January to May, leaving little room for further increases and setting the stage for potential fare improvements. Furthermore, the 20% fare hike announced for the Beijing-Shanghai high-speed rail line in May is seen as raising the price benchmark for medium- to long-distance trunk routes, thereby improving market acceptance for upward adjustments in airfares.
Demonstrated Demand Resilience Amid High Prices
Even under the extreme pressure test of high oil prices, demand has proven resilient. Data shows domestic economy class fares including fuel surcharges rose 16% and 17.3% year-over-year in April and May, respectively. During the same period, industry-wide load factors reached 86.1% and 85.6%, up 1.6 and 1.0 percentage points year-over-year, demonstrating robust demand despite higher ticket prices.
The report concludes by highlighting several risk factors, including persistently high oil prices, currency depreciation, increased geopolitical uncertainty, and demand falling short of expectations.
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