Short-term oil prices and geopolitical tensions in the Middle East are the most critical factors affecting industry operations and profitability, with near-term cost pressures potentially having peaked. Focus should remain on subsequent U.S.-Iran negotiation progress and oil price movements. Considering international aviation fuel price changes and the existing transmission mechanism, from a marginal change perspective, short-term fuel costs may have reached their peak. Recent progress in U.S.-Iran talks has boosted expectations for eased tensions and the reopening of the Strait of Hormuz, but vigilance is still required regarding profit erosion from potential geopolitical volatility, intensified short-term price swings, and sustained high mid-term oil price levels. It is recommended to continuously monitor the impact of U.S.-Iran talks progress and oil price changes on industry operations and sector sentiment. Should geopolitical conditions improve in the future, oil prices are expected to see a significant year-on-year decline by 2027-2028. The release of pent-up demand, coupled with slow growth on the supply side, could unleash the industry's profit potential.
CMSC's key views are as follows:
Review of the First Half of 2026
The industry experienced a transition from profit recovery to an oil price stress test. Q1 saw robust supply and demand leading to significant profit improvement, while Q2 was severely impacted by soaring fuel costs, although revenue is expected to continue growing and demand resilience remains strong. 1) Demand grew by 8.1% in the first four months, with growth decelerating in Q2 due to high oil prices. Specifically, national civil aviation passenger traffic (RPK) increased 9.6% year-on-year in Q1 2026, while April's RPK rose 3.7% year-on-year. 2) Industry utilization reached a new high in Q1 with relatively fast supply growth; supply growth decelerated sharply in Q2 due to the oil price shock. From January to April 2026, industry ASK increased 5.5% year-on-year, up 23.3% compared to the same period in 2019. In Q1, benefiting from year-on-year growth in aircraft numbers and improved utilization, industry ASK grew 6.8% year-on-year (the full-year 2025 ASK growth rate was 6%). In April, impacted by oil prices, industry ASK growth fell to 1.7%. 3) Benefiting from overall supply-demand improvement in Q1 and a significant rise in international route load factors since March, overall load factors showed a high-level climbing trend. The average load factor for national civil aviation from January to April 2026 was 86%, up 2 percentage points year-on-year and also 2 percentage points higher than the same period in 2019. The industry load factor in Q1 was 86%, up 2.2% year-on-year; the April industry load factor was 86.1%, up 1.6% year-on-year. 4) Fuel surcharges have driven a substantial increase in full ticket prices since Q2. Benefiting from longer average flight distances and stabilized revenue per passenger-kilometer, domestic ticket prices in Q1 2026 stopped declining year-on-year and began to rise. It is estimated that fuel surcharges caused domestic full ticket prices to rise in April-May, with base ticket prices remaining stable year-on-year or showing slight growth. Domestic and overall industry revenue continues to grow, demonstrating demand-side resilience.
Future Outlook
Short-term supply-demand pressure is significant under high oil prices, but dynamics are building. A supply-demand recovery is anticipated for 2027-2028. 1) Supply Side: The compound growth rate of fleet plans for major airlines from 2026-2028 has increased. From a manufacturer delivery perspective, delivery capacity is gradually recovering, but actual aircraft deliveries still face pressure compared to introduction plans, with actual supply capacity expected to gradually recover. 2) Demand Side: Considering the impact of high oil prices and rising travel costs in 2026 leading to a slowdown in domestic demand growth, demand growth is expected to rebound significantly in 2027 as oil prices fall, pent-up demand is released, and a low base effect takes hold. By 2028, growth is expected to return to a steady state, with an estimated three-year compound annual growth rate (CAGR) around 4%. Factoring in the 2026 slowdown and 2027 rebound, the estimated three-year CAGR for demand is around 12%. Combining domestic and international demand assumptions, the industry demand-side CAGR for 2026-2028 is estimated at around 6%. Synthesizing both supply and demand sides, 2026 industry supply-demand is expected to be significantly impacted by oil prices. The industry is likely to move beyond the oil price impact and achieve a supply-demand recovery in 2027-2028.
Airline Perspective
Under high oil prices, cost-leading airlines are more resilient and are expected to lead the industry recovery. Taking Spring Airlines as an example: 1) From a cost structure perspective, even without considering route structure differences, the airline's unit fuel cost is significantly lower than that of full-service carriers due to its cost management advantages. During oil price increases, the rise in fuel cost per available seat kilometer (ASK) is lower than for full-service carriers. Assuming the same cost compensation level, the ticket price gap between Spring and full-service airlines widens, enhancing its price advantage and increasing the difficulty of price transmission for full-service carriers. 2) From an operational perspective, as fuel cost pass-through is weaker on some routes or leads to a sharp reduction in price advantage post-transmission (turning marginal contribution negative), the industry, especially full-service carriers, has significantly reduced flights. This has effectively reduced competition for Spring Airlines and increased its market share. 3) From a profitability perspective, low-cost carriers like Spring have a higher base in terms of profit scale and margin, providing a thicker safety cushion against oil price shocks. Even with only partial pass-through of fuel costs, they can still achieve relatively high profitability.
Risk Factors
These include slower-than-expected macroeconomic growth, slower-than-expected recovery of international routes, faster-than-expected supply growth, risks of a significant rise in oil prices, and substantial depreciation of the Renminbi.
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