China’s top airlines cautious on outlook as Iran war raises fuel costs

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BEIJING/HONG KONG – China’s three largest state-owned airlines said they were cautious about the outlook for 2026 as the Iran war drives jet fuel prices sky-high, after all returned to losses in the fourth quarter of 2025.

China’s aviation industry, already grappling with oversupply in the domestic market, is now dealing with uncertainties over the Middle East crisis that has overshadowed the outlook for airlines globally.

“The impact of geopolitical conflicts will persist and the overall momentum of global economic growth will remain insufficient,” China Eastern Airlines said in its annual report issued late on March 30.

Air China, China Eastern and China Southern Airlines had returned to profit in the third quarter thanks to strong summer travel demand.

But they struggled to maintain that momentum as aggressive capacity expansion and intensifying competition – including from the country’s expanding high-speed rail network – pushed ticket prices lower even as passenger volumes grew.

Guangzhou-based China Southern slipped into the red in the fourth quarter with a loss of 1.3 billion yuan (S$243 million) despite being the only one of the three to post a full-year profit.

Shanghai-based China Eastern posted a fourth-quarter loss of 3.7 billion yuan, while Beijing-based Air China, the country’s flagship carrier, last week reported a loss of 3.64 billion yuan in the same period.

All three airlines pointed to a renewed focus on the international market as a growth driver that helped to boost revenue.

For the full year of 2025, China Eastern recorded a 22.7 per cent rise in international passenger traffic, while China Southern posted a 19.6 per cent rise and Air China’s international traffic was up 15 per cent.

Their international operations came under pressure in the fourth quarter, as they cut capacity to Japan sharply after a mid-November government travel advisory amid tensions between the two countries, which also led them to offer free refunds.

Fuel costs jump

According to aviation data platform Flight Master, Chinese airlines carried a record 94 million passengers during the 40-day Spring Festival travel rush in the first quarter of 2026, up 4.7 per cent year on year.

But analysts cautioned that the boost from holiday demand could be threatened by sharply higher fuel costs.

Before the Iran war started in February, the global airline industry had forecast record profits of US$41 billion (S$53 billion) in 2026, but a more than doubling in jet fuel prices has placed that at risk and forced carriers to rethink their networks and strategies.

China Eastern was the only one of the nation’s “Big Three” state-owned carriers to manage jet fuel price risk through hedging in 2025.

As at Dec 31, 2025, it held outstanding jet fuel hedge positions of 500,000 barrels, scheduled to expire in 2026, its annual report said. The carrier’s sensitivity analysis showed that a 5 per cent move in average jet fuel prices would have a 2.2 billion yuan impact on its total profit.

According to HSBC analysts, fuel accounted for 35 per cent to 38 per cent of the trio’s operating expenses in the first half of 2025.

Because China’s fuel surcharge mechanism tends to lag behind and rarely fully offsets higher costs, rising oil prices are likely to erode profit margins, the analysts said.

“We think aggressive fuel surcharge implementation would risk demand destruction that proves self-defeating, especially in China, where high-speed rail offers a compelling substitute at a much lower cost than economy airfares,” the HSBC analysts said in a recent note.

The three carriers were expected to post deeper losses in 2026 before returning to profit in 2027, the analysts added.

The airlines continue to take delivery of Chinese planemaker COMAC’s C919 narrow-body jets, though they received fewer than expected in 2025. China Southern lifted its expectations for 2026 deliveries to 13 from eight previously, while China Eastern and Air China both maintained forecasts for 10. REUTERS