Summer travel passenger traffic has rebounded, but fares remain weak; China aviation has yet to reach a true inflection point

Overview

The report reviews passenger traffic, fares, RPK, load factors, and profit warnings for the first half of the 2026 summer travel season. Demand improvement in late July reduced near-term downside risk, but passenger growth has not translated into improvements in fares and yields. High oil prices, limited fuel surcharge pass-through, and high-speed rail substitution continue to weigh on profits. JPMorgan therefore cuts FY26E earnings forecasts for covered airlines and believes market consensus still has room for downward revision.

Core views

The industry does not yet have clear conditions for a turnaround. First, passenger flights and passenger volume recovered in July, but base fares fell 4% YoY, indicating that demand quality remains weak. Second, the average Brent price in 2026 is expected to be US$85/bbl, while Chinese airlines have limited hedging, making earnings highly sensitive to spot jet fuel prices. Third, the Big Three airlines are expected to remain loss-making in FY26E, and their average net loss in 2Q26 may reach Rmb4.3B, the worst second-quarter loss in nearly three years. At the stock level, Spring Airlines maintains relative resilience through its significant cost advantage; Air China benefits from a better hub and passenger mix as well as Cathay Pacific contributions; China Eastern and China Southern face higher downside risk to earnings.

Analysis framework

The report combines FlightMaster high-frequency flight and fare data, industry and company RPK and load factor trends, 1H26 profit warnings, JPMorgan commodity oil price forecasts, and Bloomberg consensus expectations to update company earnings models. It then ranks peers based on cost efficiency, route structure, hub resources, and earnings resilience, and derives target prices using P/B valuation and A/H premiums.

Methodology notes

• Operating data analysisHigh-frequency aviation demand tracking

  Assess the quantity and quality of demand recovery through flight volume, passenger volume, RPK, load factors, and fares.

  The report emphasizes that a turnaround cannot be confirmed solely based on passenger traffic improvement in late July; high-frequency indicators such as base fares, international route recovery, and load factors still need to be monitored continuously.

• Earnings forecastCost and yield sensitivity analysis

  Evaluate airline profits based on base fares, fuel prices, surcharge pass-through, and capacity utilization.

  Brent and jet fuel prices are the largest cost variables, while weak base fares and limited surcharge pass-through make it difficult for passenger traffic growth to fully translate into profits.

• Relative value analysisAirline peer ranking

  Compare cost efficiency, hub advantages, passenger mix, RPK, load factors, and external investment income.

  Spring Airlines ranks first due to its low-cost model; Air China ranks second thanks to operating resilience and Cathay Pacific contributions; China Eastern and China Southern face higher earnings risk.

• Valuation methodsP/B-ROE valuation

  Select target price-to-book multiples based on the historical relationship between P/B and ROE, and apply A/H premiums to A-share target prices.

  Air China H uses 1.3x FY27E P/B, while China Eastern H uses 1.2x FY27E P/B; the corresponding A-share target prices are derived from H-share target prices plus A/H premiums.

Asset mapping & comparison

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

• Spring Airlines

  The preferred name among covered airlines, rated Neutral.

  Strengths

  Strict cost control, A320 fleet standardization, and improved fuel efficiency from A321neo aircraft; unit costs are 45% to 50% lower than those of the Big Three airlines, and the company is expected to remain profitable.

  Weaknesses

  FY26E net profit forecast has been cut by 25%, and current valuation is considered relatively fair, leaving limited room for further re-rating.

  Comparison

  Ranks first relatively and is the only Chinese airline within coverage expected to remain profitable in both 1H26 and FY26E.

  Risks

  Demand recovery falling short of expectations, persistently weak fares, and elevated fuel prices.

• Air China H/A（0753.HK、601111.SS）

  The preferred state-owned airline, with both H-share and A-share ratings at Neutral.

  Strengths

  Dual hubs in Beijing, a higher share of business travelers, stronger load factor performance, and investment income from its 29% stake in Cathay Pacific.

  Weaknesses

  FY26E net loss is still expected at Rmb3.3B, while fuel costs, base fares, and surcharge pass-through continue to limit earnings visibility.

  Comparison

  Operating resilience is better than China Eastern and China Southern, and it is expected to have the smallest loss among the Big Three airlines.

  Risks

  Brent above US$85/bbl, RMB depreciation, geopolitical conflicts disrupting European routes, high-speed rail competition, and equity dilution from capital raising.

• China Eastern H/A（0670.HK、600115.SS）

  Rated Underweight, with relatively high downside risk to earnings.

  Strengths

  It has about 43% market share at Shanghai Pudong and Hongqiao airports, with scarce slot resources forming a long-term entry barrier.

  Weaknesses

  Domestic RPK in 2Q26 fell about 5% YoY, the domestic load factor in June fell 2 percentage points YoY, and FY26E net loss is expected at Rmb4.0B.

  Comparison

  Recovery in both international and domestic operations lags Air China, but its relative ranking remains above China Southern.

  Risks

  High oil prices, weak base fares, slower-than-expected recovery in international yields, RMB depreciation, and high-speed rail competition.

• China Southern H/A（1055.HK）

  Rated Underweight and ranked lowest among covered companies.

  Strengths

  It has a large fleet and dual hubs in Guangzhou and Beijing Daxing, making it a high-sensitivity play on the recovery of domestic aviation demand in China.

  Weaknesses

  About 73% of capacity is exposed to the domestic market, making it more sensitive to weak base fares, high-speed rail substitution, and limited surcharge pass-through, while load factors remain under pressure.

  Comparison

  Earnings and operating risks are higher than Air China and China Eastern, and its 2Q26 loss is expected to be the largest among the Big Three airlines.

  Risks

  Weak domestic demand, elevated oil prices, fare competition, high-speed rail substitution, RMB depreciation, and potential capital dilution.

Key data

• July passenger flights531,000 flights, averaging more than 17,100 flights per day, up 1% YoYA clear improvement versus an approximately 2% YoY decline in average daily flights in the first half of July.
• July passenger volumeAbout 74MM passengers, up 4% YoYDomestic passenger volume grew more than 6% YoY in the second half of July, while cross-border passenger volume grew more than 5% YoY.
• Domestic economy-class faresRmb835 including fuel surcharges, down 1% YoYBase fares excluding fuel surcharges fell from Rmb830 to Rmb795, down 4% YoY.
• Brent oil price forecast3Q26 US$86/bbl; 4Q26 US$80/bbl; 2026 US$85/bblJet fuel prices remain about 65% above pre-conflict levels, and airlines have limited hedging.
• FY26E average net loss of the Big Three airlinesAbout Rmb4.0BBloomberg consensus is for a loss of about Rmb1.5B, indicating continued downside revision risk to market forecasts.
• 2Q26 average net loss of the Big Three airlinesRmb4.3BExpected to be the worst second-quarter loss in nearly three years.
• Air China FY26E net lossRmb3.3BThe smallest loss among the Big Three airlines, supported by investment income from Cathay Pacific.
• Spring Airlines FY26E net profitRmb1.5BCut by 25% from Rmb2.0B and below the consensus forecast of Rmb2.4B.
• Air China H valuationCurrent price HK$4.30; target price HK$4.30Rated Neutral, with the target price based on 1.3x FY27E P/B.
• China Eastern H valuationCurrent price HK$3.26; target price HK$2.60Rated Underweight, with the target price based on 1.2x FY27E P/B.
• China Southern H valuationCurrent price HK$3.50; target price HK$2.70Rated Underweight; higher domestic market exposure makes it more vulnerable to weak fares and high-speed rail substitution.

Impact & implications

For investors, the rebound in passenger traffic only alleviates near-term downside risk and is not yet sufficient to establish an industry earnings recovery thesis. Before sustained improvements emerge in base fares, oil prices, and profit visibility, the valuation floor for airline stocks remains difficult to determine. In allocation, investors should prioritize Spring Airlines and Air China, which have better cost structures or stronger operating resilience, and remain cautious on China Eastern and China Southern, which face larger downward revisions to earnings forecasts.

Risks

• Brent and jet fuel prices higher than the base-case forecast, further compressing margins.
• Base fares continuing to decline, preventing passenger traffic growth from translating into yield improvement.
• Limited fuel surcharge pass-through, which may also suppress demand due to higher total ticket prices.
• Accelerated substitution by high-speed rail for price-sensitive domestic travelers.
• RMB depreciation increasing US-dollar-denominated fuel, leasing, and debt costs.
• International route recovery slower than expected or geopolitical conflicts disrupting routes such as European routes.
• Capital replenishment plans may cause equity dilution.
• Further downward revisions to market consensus earnings forecasts, leading to continued valuation pressure.

What to watch

• Whether domestic and cross-border flight volume and passenger volume can sustain YoY growth in the coming weeks.
• Whether base fares excluding fuel surcharges stop falling and achieve YoY improvement.
• Changes in Brent and Singapore jet fuel prices relative to the US$85/bbl benchmark.
• The actual pass-through rate after fuel surcharge increases and the degree to which it suppresses demand.
• RPK, load factors, and 2H26 profit trends for the Big Three airlines, especially whether Air China's relative advantage can persist.
• International route recovery, the RMB exchange rate, and high-speed rail diversion trends.
• Whether the CAAC anti-involution policy can promote supply discipline and improvements in domestic fares.