CITIC SEC released a research report stating that the release of civil aviation fleet capacity is constrained by factors such as low new aircraft deliveries, engine maintenance, and spare parts shortages. During peak seasons, fleet utilization rates are approaching maximum capacity. Recent recovery in business and official travel demand has been notable, with expectations for further policy stimulus in private travel demand by 2026. The report reiterates the importance of "focusing on airlines' profit turning point."
In Q3, major airlines achieved passenger revenue per kilometer (RRPK) on international routes comparable to domestic routes, reversing the underperformance trend since 2015. The strategy of "flying farther, flying internationally, and targeting emerging markets" has helped dilute unit non-fuel costs amid low oil prices and weak domestic demand recovery. By 2025, major airlines are expected to post their first post-pandemic profits, marking the beginning of a profit release cycle. CITIC SEC remains optimistic about airline performance over the next two years.
Key insights include: 1. **Short-Term Demand Recovery**: Business and official travel demand continues to rebound, potentially aligning with moderate currency appreciation. Sample airline data shows international RRPK matching domestic levels, with capacity shifting toward long-haul routes to improve utilization and reduce unit costs. Increasing transfer passenger ratios may enhance revenue more effectively than focusing solely on domestic RRPK. 2. **Cost Management**: Lower jet fuel costs remain crucial for profit recovery. Differences in fleet utilization due to engine maintenance and operational strategies have led to varying unit non-fuel costs. Airlines are also improving financial efficiency through refined management. 3. **Demand Diversification**: Off-season passenger load factors remain high (85.3%-93.2%), with potential for fare elasticity as airlines reduce domestic overcapacity ("anti-involution"). Business demand recovery and currency appreciation could narrow Q4 2025 losses significantly.
**Recovery Acceleration**: PPI inflection points historically signal air travel demand rebounds. For example, in 2010, China Southern Airlines' RPK grew 20%-29% YoY for eight months, aligning with PPI trends. The narrowing PPI decline and positive CPI growth in October 2025 may accelerate demand recovery, supported by fiscal policies boosting consumption and income redistribution.
The winter-spring 2025/26 flight schedule shows Japan routes accounting for 22.6%/22.3%/13.7% of international flights for China Eastern, Air China, and China Southern, respectively, while Spring Airlines and Juneyao Air exceed 50%. Short-term disruptions require monitoring, with potential spillover to Southeast Asian and domestic Northeast routes.
**Supply Constraints**: Fleet growth remains tight due to low new deliveries, engine issues, and spare parts shortages. Nominal capacity CAGR for six listed airlines is projected at 4.6% for 2024-2027, but actual net additions in 2022-2024 were only 48.9%/44.9%/58.2% of planned levels. Under varying scenarios, fleet CAGR may range from 2.1% to 3.6%. High leasing costs, aging fleet replacements, and PW1100G engine maintenance further limit effective capacity.
**Investment Strategy**: Business demand recovery and currency appreciation may sharply reduce Q4 2025 losses. Prioritizing long-haul international routes and transfer passengers could outperform domestic-focused strategies. PPI trends favor airline recovery, with short-term disruptions offering entry opportunities.
**Risks**: Weaker-than-expected travel demand, faster aircraft deliveries, geopolitical events, and oil/currency volatility.
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