Aviation stocks collectively declined. At the time of writing, China Eastern Airlines (00670) fell 4.6% to HK$3.73. China Southern Airlines (01055) dropped 4.02% to HK$4.06. Air China (00753) decreased 3.01% to HK$4.83. Cathay Pacific Airways (00293) was down 2.56% to HK$11.44.
The market movement follows U.S. President Trump's televised address on the Middle East situation. He warned that the U.S. would deliver a severe strike against Iran within the next two to three weeks, even threatening to bomb local power plants if an agreement is not reached. His hardened rhetoric dampened market hopes for a swift end to the conflict.
Consequently, international oil prices surged significantly. At the time of writing, WTI crude rose over 4% to $104.35 per barrel. Brent crude increased nearly 5% to $106.195 per barrel.
Analysis indicates that fuel costs constitute approximately 35% of airline operating expenses. A static calculation suggests a substantial impact on profitability, although the actual effect depends on supply and demand dynamics. China's aviation supply has entered an era of low growth, while demand stands to benefit fully from consumption stimulus measures. Continued positive supply-demand conditions are expected to mitigate the impact of oil price increases beyond initial concerns.
For domestic routes, the imposition of fuel surcharges is expected to cover a significant portion of the rising oil costs. The favorable supply-demand environment will aid in the effective pass-through of these costs. Regarding international routes, the Middle East conflict significantly affects operations at hubs like Dubai and Doha on Asia-Europe routes. China-Europe routes are benefiting from increased domestic transfers and new international transit traffic, leading to substantial fare increases. This is anticipated to further offset a portion of the oil price hike.
