Summer Travel Demand Exceeds Expectations, but Rising Oil Prices Offset the Benefits of Fare Recovery
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Summer Travel Demand Exceeds Expectations, but Rising Oil Prices Offset the Benefits of Fare Recovery
As of August 9, 2026, cumulative summer travel passenger traffic rose 4.2% YoY and domestic fares continued to recover, but the three major airlines’ fuel surcharges can cover only about 55% of incremental fuel costs, leaving oil prices as the dominant driver of earnings and valuations.
- In the first week of the summer travel season, passenger traffic declined YoY due to delayed primary and secondary school holidays and concentrated capacity deployment; it continued to recover from the second week onward, with cumulative passenger traffic up 4.2% YoY as of August 9, better than prior market expectations.
- Weekly YoY growth in domestic fares including and excluding fuel surcharges improved from -2% and -15% in the first week to +4% and -1% in the sixth week.
- The three major airlines’ fleets have grown only 0.4% so far in 2026, significantly below the full-year plan of 2.4%, and slower aircraft deliveries are expected to maintain industry supply constraints.
- Fuel surcharges are expected to cover only about 55% of the three major airlines’ incremental fuel costs, while Spring Airlines can cover about 80% to 81%, making it more defensive against oil prices.
- High oil price assumptions have led to wider 2026 net loss forecasts for the three major airlines and triggered target price cuts; China Southern Airlines is the most sensitive to oil price changes.
Report interpretation
Overview
The report tracks China aviation passenger traffic, fares, flight and seat supply, load factors, aircraft utilization, outbound route capacity, and oil price changes during the 2026 summer travel season. Demand-side performance was clearly better than previous market expectations, and domestic fares also continued to recover as passenger traffic stabilized and August fuel surcharges were lowered; however, high oil prices amid disruptions in the Strait of Hormuz continue to pressure airline costs, and fuel surcharges can only partially pass through costs. Therefore, the report broadly maintains revenue forecasts but lowers 2026 earnings expectations and target prices.
Core views
Aviation demand is shifting from weakness at the beginning of the summer travel season to steady growth, and aircraft deliveries continue to fall short of plans, keeping the supply-tightness thesis intact. Domestic base fares have not yet fully recovered, but fares including fuel surcharges are close to flat YoY, while fares on major international routes have largely passed through fuel costs. Near-term industry fundamentals are improving alongside pressure from high oil prices: if oil prices fall, the earnings leverage of the three major airlines is significant, with China Southern Airlines having the greatest leverage; if oil prices remain high, Spring Airlines, with stronger cost control and higher fuel surcharge coverage, is relatively better positioned.
Analysis framework
The report combines data from OAG, DAST, WIND, FlightMaster, CAAC, CEIC, and company sources to track passenger traffic, flights, seats, fares, load factors, and aircraft utilization on a weekly basis, while incorporating capacity structure, fuel surcharges, and Brent oil prices into earnings sensitivity analysis. For valuation, it uses expected 2026 price-to-book ratios and cycle-peak returns on equity as the core framework, setting target multiples and premiums separately for A-shares and H-shares.
Methodology notes
Assess inflection points in aviation supply and demand through weekly changes in passenger traffic, flights, seats, load factors, and fares.
The report compares 2026 summer travel data with the same period in 2025 and 2019 levels, while distinguishing between domestic and outbound markets and between fares including and excluding fuel surcharges, to identify real fares and cost pass-through capability.
Estimate the impact of oil price changes, fuel surcharge coverage ratios, and route mix adjustments on airline net profits.
The report estimates that the three major airlines’ fuel surcharges can cover only about 55% of incremental fuel costs, while Spring Airlines can cover about 80% to 81%; for every 1% decline in oil prices, China Southern Airlines’ expected 2026 net profit rises by about 5%, China Eastern Airlines and Air China by about 3% to 4%, and Spring Airlines by about 1%.
Determine target price-to-book ratios based on expected cycle-peak return on equity, and derive target prices in both markets using A-share and H-share premiums.
Spring Airlines uses 2.8x expected 2026 price-to-book; China Southern Airlines A-shares and H-shares use 3.2x and 2.2x respectively; China Eastern Airlines uses 3.3x and 2.5x respectively; Air China uses 3.6x and 2.6x respectively.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- Spring Airlines (601021.SS)Leading low-cost carrier and a relatively defensive target in a high oil price environment
- Strengths
- Strong low-cost advantage, with fuel surcharges able to cover about 80% to 81% of incremental fuel costs; rising low-cost carrier penetration and price-sensitive demand are favorable for its growth and return on equity.
- Weaknesses
- Overseas expansion may be constrained by pilot shortages, and it faces issues such as subsidy sustainability and weaker-than-expected penetration in lower-tier markets.
- Comparison
- For every 1% decline in oil prices, expected 2026 net profit sensitivity is about 1%, lower than the three major airlines, making it relatively stable in a high oil price environment but less leveraged when oil prices fall rapidly.
- Risks
- Macroeconomic uncertainty, slower expansion in lower-tier markets, subsidy rollbacks, tighter environmental regulation, and pilot shortages.
- China Southern Airlines (600029.SS, 1055.HK)The three-major-airline target with the greatest leverage to falling oil prices
- Strengths
- Leading fleet scale, with about 40% market share at the Guangzhou hub; for every 1% decline in oil prices, expected 2026 net profit can rise by about 5%.
- Weaknesses
- Relatively lower exposure to premium passengers, which may make it slightly weaker than peers during phases of fare increases; current high oil prices have a large impact on earnings.
- Comparison
- The report maintains Neutral on A-shares and Buy on the lower-valued H-shares, reflecting more attractive risk-reward for H-shares.
- Risks
- Fares weaker than expected, aviation fuel costs higher than expected, declining cargo yields, and aircraft supply recovering faster than expected.
- China Eastern Airlines (600115.SS, 0670.HK)Benefits from Shanghai hub fare increases and international route recovery
- Strengths
- About 38% market share in Shanghai and about 48% share on the Beijing-Shanghai route, giving it a high degree of benefit from fare increases; leading exposure to high-yield China-Japan and China-South Korea routes.
- Weaknesses
- Still expected to post losses in 2026, while rising oil prices and volatility in international demand recovery will amplify earnings uncertainty.
- Comparison
- Compared with the other major airlines, its Shanghai hub pricing power and Northeast Asia route exposure are more prominent, with every 1% decline in oil prices corresponding to about 3% to 4% upside sensitivity in net profit.
- Risks
- Uncertainty in demand recovery, industry supply higher than expected, declining subsidy sustainability, and rising fuel costs.
- Air China (601111.SS, 0753.HK)A major beneficiary of business demand in higher-tier cities and fare increases
- Strengths
- Highest exposure to first- and second-tier cities and business travelers, with passenger yield per RPK and margins leading among the three major airlines; Cathay Pacific joint venture earnings can provide additional profit support.
- Weaknesses
- The pace of business travel recovery and contributions from associates are uncertain, while high oil prices still significantly suppress earnings.
- Comparison
- Its pricing power is better than most peers, with every 1% decline in oil prices corresponding to about 3% to 4% upside sensitivity in expected 2026 net profit.
- Risks
- Business travel recovery slower than expected, insufficient earnings contribution from Cathay Pacific, fuel costs higher than expected, and weak fare performance.
Key data
- Cumulative total summer travel passenger traffic+4.2% YoYAs of August 9, 2026; domestic and outbound passenger traffic increased by 4.3% and 3.1%, respectively.
- Domestic weekly faresIncluding surcharges +4%, excluding surcharges -1% YoYAs of the sixth week of the summer travel season, a significant improvement from -2% and -15% in the first week.
- Cumulative domestic summer travel faresRoughly flat including surcharges, -9% YoY excluding surchargesAs of August 9, 2026, the YoY decline in fares continued to narrow.
- Cumulative fares on major international routes+9% YoYAs of August 9, 2026, indicating that higher fuel costs have largely been passed through.
- Improvement in average summer travel load factor+1.7 percentage points YoYThe single-day YoY improvement as of August 9 had widened to 2.5 percentage points.
- Outbound seat capacity+3% YoYEurope, South Korea, and Southeast Asia increased by 23%, 18%, and 14%, respectively, while Japan declined by 52%.
- Fleet growth of the three major airlines+0.4%Growth so far in 2026, below the full-year plan of 2.4%, with a cumulative delivery shortfall of 55 aircraft.
- August domestic fuel surchargeRmb40 or Rmb70 per personFor routes not exceeding 800 km and exceeding 800 km, respectively, down Rmb10 and Rmb30 from July.
- Incremental fuel cost coverage ratioAbout 55% for the three major airlines, about 80% to 81% for Spring AirlinesFuel surcharges cannot fully offset the impact of high oil prices on the three major airlines.
- 2026 Brent average price forecastUS$86/barrelGoldman Sachs expects it to fall to US$75 and US$71/barrel in 2027 and 2028, respectively.
Impact & implications
Stronger-than-expected demand and insufficient fleet deliveries jointly support medium-term fares and load factors, but high oil prices mean industry earnings improvement will significantly lag revenue recovery. Investment can follow two main themes: first, selecting Spring Airlines, which has stronger cost and fuel surcharge coverage capability and lower oil price sensitivity; second, focusing on the earnings recovery leverage of the three major airlines in an oil price decline scenario, with China Southern Airlines offering the greatest leverage, while China Eastern Airlines and Air China benefit from Shanghai hub pricing power and business traveler groups in higher-tier cities, respectively. Valuation differences between A-shares and H-shares also make China Southern Airlines H-shares’ risk-reward more favorable than its A-shares.
Risks
- Brent and aviation fuel prices are higher than expected, and fuel surcharges cannot adequately pass through costs.
- Domestic and international passenger traffic recovery is weaker than expected, especially business travel and demand on Japan routes.
- Airlines add capacity in a concentrated manner or aircraft deliveries accelerate, weakening the tight supply-demand balance and fare recovery.
- Severe weather, geopolitics, and route disruptions affect flight operations and fuel costs.
- Fares, cargo yields, and load factors are below forecasts.
- Reduced government subsidies, tighter environmental regulation, and shortages of key resources such as pilots.
What to watch
- Whether passenger traffic growth, load factors, and domestic base fares can continue to improve during the remainder of the August summer travel season.
- Brent oil prices, Strait of Hormuz disruptions, and changes in China and Singapore aviation fuel prices.
- The next round of fuel surcharge adjustments and their impact on fares and demand.
- Aircraft delivery shortfalls at the three major airlines, fleet growth, and the pace of domestic flight deployment.
- Capacity and fare performance on China-Japan, China-South Korea, Europe, and Southeast Asia routes.
- Progress in narrowing 2026 losses at the three major airlines and the sustainability of Spring Airlines’ cost advantage.