Domestic fuel surcharges jump sixfold, pressuring both airline demand and margins

Overview

This report focuses on demand and earnings prospects for the Chinese aviation sector after the sharp increase in the domestic fuel surcharge. Starting April 5, China's domestic route fuel surcharge was raised from Rmb20/Rmb10 for routes above/below 800 km to Rmb120/Rmb60, triggered by Middle East tensions that pushed up oil prices and drove a sharp month-on-month increase in jet fuel costs. The adjustment took effect in the middle of the Qingming holiday, and Ministry of Transport data showed air passenger traffic fell 1.3% y/y over the three-day holiday, while rail traffic rose 8% y/y, indicating that air travel demand was hit by price pressure and substituted by rail.

Core views

The core view is that both the cost side and the demand side are deteriorating at the same time. Although the fuel surcharge has been increased, airlines cannot fully pass through fuel costs; at the same time, higher total ticket prices are pushing price-sensitive travelers toward rail. Some airlines are lowering base fares to offset the surcharge increase and protect load factors, but this compresses revenue per ticket. J.P. Morgan expects this demand weakness may persist into the May Day Labor Day holiday, a key revenue window, and deepen industry FY26 losses.

Analysis framework

The report combines analysis of the policy-based fuel surcharge mechanism, jet fuel price transmission, holiday passenger flow data, fare behavior, and earnings sensitivity at the company level. On the demand side, it compares Qingming holiday growth in air, rail, and all-mode traffic; on the cost side, it estimates the impact on net profit of a US$10/bbl increase in jet fuel prices for China Eastern, China Southern, and Air China.

Methodology notes

• Cost transmission analysisDomestic fuel surcharge mechanism

  The fuel surcharge is recalibrated on the 5th of each month based on the prior month’s jet fuel procurement cost, and is triggered when the domestic comprehensive jet fuel price exceeds Rmb5,000/tonne.

  For routes of 800 km and below, the per-unit charge rate is multiplied by the portion of comprehensive cost above Rmb5,000, then multiplied by 800; for routes above 800 km, it is multiplied by 1,500. The mechanism lags by about one month and has historically covered only 70% to 80% of incremental fuel costs.

• Demand substitution analysisAir versus rail passenger flow comparison

  By comparing holiday air passenger y/y changes with rail and all-mode transport growth, the report assesses transportation substitution after fare increases.

  During the Qingming holiday, air passenger traffic fell 1.3% y/y, rail traffic rose 8% y/y, and all-mode traffic rose 6% y/y, showing that air travel is relatively weaker and rail diversion has already emerged.

• Earnings sensitivity analysisJet fuel price sensitivity

  Estimate the negative impact of higher jet fuel prices on airline net profit.

  The report estimates that for every US$10/bbl increase in jet fuel costs, net profit would fall by about Rmb4.2–4.3bn for China Eastern and China Southern, and by about Rmb3.2bn for Air China.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• China Eastern Airlines - A (600115.SS)

  Covered airline, rated UW

  Strengths

  Has both domestic and international route networks, and international route surcharges have already been raised in some regions.

  Weaknesses

  Faces significant cost absorption pressure as fuel prices rise; the report estimates that a US$10/bbl increase in jet fuel costs would reduce net profit by about Rmb4.2–4.3bn.

  Comparison

  Like other major Chinese airlines, it faces pressure from higher fuel costs and demand elasticity; domestic demand after Qingming was weaker than rail.

  Risks

  Further oil price increases, wider fare discounts, weaker-than-expected May Day demand, and inability of the fuel surcharge to fully cover costs.

• China Eastern Airlines - H (0670.HK)

  Covered airline, rated UW

  Strengths

  Same company as China Eastern Airlines, with the ability to raise surcharges on international routes.

  Weaknesses

  The H-share is likewise exposed to higher fuel costs and weakening domestic demand.

  Comparison

  Fundamentals are broadly the same as the A-share counterpart, while valuation and liquidity are affected by the Hong Kong market environment.

  Risks

  Demand diversion, oil price volatility, and weaker risk appetite in the Hong Kong market.

• China Southern Airlines - A (600029.SS)

  Covered airline, rated UW

  Strengths

  Has a broad route network, and has raised surcharges on international routes to Southeast Asia, Australia and New Zealand, among others.

  Weaknesses

  The report estimates that a US$10/bbl increase in jet fuel costs would reduce net profit by about Rmb4.2–4.3bn, indicating significant cost pressure.

  Comparison

  Similar to China Eastern, it faces demand price elasticity and insufficient cost pass-through after the domestic surcharge hike.

  Risks

  Base fare cuts, passenger volumes below expectations, continued oil price increases, and wider FY26 losses.

• China Southern Airlines - H (1055.HK)

  Covered airline, rated UW

  Strengths

  Shares the same operating base as the A-share, and its international network can partially pass through costs via surcharges.

  Weaknesses

  Domestic travelers are becoming more price-sensitive, and the surcharge increases total travel costs.

  Comparison

  Like other Chinese airline H-shares, it is influenced by both sector fundamentals and Hong Kong market risk appetite.

  Risks

  Passenger diversion to rail, weaker unit revenue, and oil and FX volatility.

• Air China - A/H

  Related airline within coverage; the report provides fuel sensitivity but does not show a rating change in this summary

  Strengths

  Balanced domestic and international route network, with relatively lower price elasticity on long-haul travelers.

  Weaknesses

  The report estimates that a US$10/bbl increase in jet fuel costs would reduce net profit by about Rmb3.2bn.

  Comparison

  The fuel sensitivity amount is lower than the estimates for China Eastern and China Southern, but the company still faces the same industry-wide pressure.

  Risks

  High jet fuel prices, lagged surcharge transmission, and suppressed domestic demand.

Key data

• Domestic fuel surcharge adjustment date2026-04-05All Chinese airlines began implementing the new domestic fuel surcharge.
• Surcharge for routes 800 km and belowraised from Rmb10 to Rmb60A sixfold increase in the per-segment surcharge for short-haul routes.
• Surcharge for routes above 800 kmraised from Rmb20 to Rmb120A sixfold increase in the per-segment surcharge for long-haul domestic routes.
• Qingming holiday air passenger growth-1.3% Y/YAir traffic over the three-day holiday was weaker than overall transport and rail.
• Qingming holiday rail passenger growth+8% Y/YShows rail substituting for air travel.
• All-mode transport growth+6% Y/YAir travel clearly lagged overall travel demand.
• Base fare adjustment on some trunk routescut by 15% to 25%Applies to routes such as Shenzhen-Shanghai, Shenzhen-Chengdu, and Shenzhen-Chongqing, reflecting airlines offsetting the surcharge by lowering base fares.
• Fuel cost as a share of operating costs30% to 35%Fuel is the largest cost item for Chinese airlines.
• Cost pass-through ratio of the surcharge mechanismabout 70% to 80%The remaining cost is still absorbed by airlines.
• Fuel surcharge as a share of short-haul faresRmb60 accounts for more than 10% of a short-haul fare of Rmb500+Enough to affect travel decisions for price-sensitive passengers.

Impact & implications

The investment implication is negative. A higher fuel surcharge does not equate to profit protection because cost pass-through is incomplete and demand may be weakened by higher ticket prices. If airlines cut base fares to preserve load factors, unit revenue comes under pressure; if they do not cut prices, traffic may continue to shift to rail. If weakness persists into the May Day holiday, a key peak season window, FY26 loss pressure will intensify.

Risks

• Middle East conflict or other geopolitical factors continue to push up oil and jet fuel prices.
• The domestic fuel surcharge cannot fully pass through incremental fuel costs, forcing airlines to absorb part of the cost.
• Price-sensitive travelers shift to rail, putting pressure on air traffic and load factors.
• Airlines cut base fares to maintain load factors, weakening revenue per ticket and margins.
• May Day Labor Day holiday demand falls short of expectations, amplifying FY26 loss risk.
• Cumulative increases in surcharges on both international and domestic routes raise overall travel costs and dampen demand.

What to watch

• Air passenger volumes, load factors, and fare trends during the May Day holiday.
• Whether Singapore jet fuel spot prices and domestic comprehensive jet fuel prices stay above Rmb5,000/tonne.
• Whether airlines continue the strategy of raising surcharges while cutting base fares.
• The growth gap between rail traffic and air traffic, to judge whether substitution is widening.
• Whether FY26 loss forecasts for China Eastern, China Southern, and Air China are revised down further.
• Whether long-haul travel demand remains resilient after international route surcharge increases.