China airlines turn cautious as fuel costs surge amid Iran war
Synopsis
China’s major airlines turn cautious as fuel costs surge and profits come under pressure.
China’s top three state-owned airlines have flagged a cautious outlook for the year ahead, as surging fuel costs linked to the Iran war weigh heavily on profitability despite strong travel demand.
Key highlights
- China’s Big Three airlines warn of weak outlook
- Iran war drives sharp rise in jet fuel costs
- Airlines return to losses in Q4 2025
- Strong passenger growth offset by lower fares
- Profit recovery pushed further out to 2027
Outlook warning
Air China, China Eastern Airlines and China Southern Airlines said geopolitical tensions and slowing global growth are clouding their outlook.
China Eastern warned that the impact of geopolitical conflicts would persist, limiting recovery momentum.
Return to losses
All three airlines slipped back into losses in the fourth quarter of 2025 after briefly returning to profit in the third quarter.
China Southern reported a quarterly loss of 1.3 billion yuan, while China Eastern and Air China posted losses of 3.7 billion yuan and 3.64 billion yuan respectively.
Demand vs pricing
Passenger demand remained strong, but airlines struggled to maintain profitability.
Aggressive capacity expansion and intense competition, particularly from China’s high-speed rail network, pushed ticket prices lower even as passenger volumes increased.
International growth
International travel emerged as a key growth driver over the full year.
China Eastern reported a 22.7% rise in international passenger traffic, followed by China Southern at 19.6% and Air China at 15%.
However, international operations weakened late in the year after capacity cuts to Japan amid geopolitical tensions.
Fuel cost surge
Rising fuel costs have become the biggest challenge for the sector.
Jet fuel prices have more than doubled since the Iran war began, threatening margins across the industry.
Fuel accounted for roughly 35% to 38% of operating expenses for the three carriers in early 2025, according to HSBC analysts.
Limited pricing power
Airlines face difficulty passing on higher costs to consumers.
China’s fuel surcharge system typically lags price movements and rarely offsets rising costs fully.
Analysts warn that aggressive fare hikes could reduce demand, especially given cheaper alternatives like high-speed rail.
Profit outlook delayed
The global airline industry had earlier projected record profits in 2026, but rising fuel costs have put those expectations at risk.
Analysts now expect deeper losses in 2026, with a return to profitability likely only by 2027.
Hedging advantage
China Eastern was the only major carrier to hedge fuel prices in 2025.
It held hedge positions covering 500,000 barrels, with a 5% move in fuel prices estimated to impact profits by 2.2 billion yuan.
Fleet expansion
The airlines continue to expand fleets with deliveries from COMAC, including the C919 narrow-body jet.
China Southern raised its expected 2026 deliveries, while China Eastern and Air China maintained steady projections.
Australia angle
For Australia, rising global aviation fuel costs could lead to higher airfares, particularly on international routes.
This may affect outbound travel demand and airline profitability, including routes connecting Australia with Asia.
It also highlights how global energy shocks can ripple through travel, tourism and trade-linked sectors.
Now what?
Airlines will closely monitor fuel prices and geopolitical developments, while adjusting capacity and pricing strategies.
The pace of recovery in international travel and the trajectory of oil markets will be key to determining when profitability returns.
FAQs
Q1: Why are China’s airlines cautious about the outlook?
Due to rising fuel costs and geopolitical uncertainty.
Q2: What caused the recent losses?
Higher fuel prices, lower ticket yields and increased competition.
Q3: Is passenger demand strong?
Yes, passenger volumes are growing, especially internationally.
Q4: Why can’t airlines raise prices?
Competition and alternative transport options limit pricing power.
Q5: When will profitability return?
Analysts expect a recovery by 2027.
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I write about markets, money, and the macro forces that move them. Passionate about turning complex economic trends into sharp, easy-to-understand stories. Off the clock, it’s hip hop, rock, reggae -- and a mix of cricket and basketball.
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