China's Airlines Face Financial Turbulence Amid Rising Fuel Costs

China's three largest state-owned airlines—Air China, China Eastern, and China Southern—are expressing caution regarding their financial outlook for 2026 due to soaring jet fuel prices driven by the ongoing Iran war. After returning to profitability in the third quarter of 2025, these airlines reported significant losses in the fourth quarter, highlighting the impact of increased operational costs and competitive pressures within the domestic market.

The Straits TimesChina’s Big Three Airlines Hit Turbulence From Fuel Costs

In the fourth quarter of 2025, China Southern Airlines recorded a loss of 1.3 billion yuan (approximately S$243 million), while China Eastern Airlines and Air China reported losses of 3.7 billion yuan and 3.64 billion yuan, respectively. The airlines had previously benefited from a surge in summer travel demand, but aggressive capacity expansion and heightened competition, particularly from China's expanding high-speed rail network, have pressured ticket prices downward despite rising passenger volumes.

The Straits TimesChina’s Big Three Airlines Hit Turbulence From Fuel Costs

The conflict in the Middle East has led to a dramatic increase in jet fuel prices, which analysts estimate could significantly affect profit margins for the airlines. According to HSBC analysts, fuel costs accounted for 35% to 38% of the operating expenses for these airlines in the first half of 2025. The airlines' fuel surcharge mechanisms are often slow to adjust, meaning that rising oil prices may not be fully offset, further eroding profitability.

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China Eastern Airlines has taken proactive measures by hedging against jet fuel price fluctuations, holding positions of 500,000 barrels set to expire in 2026. However, the overall sentiment among analysts is that the airlines may face deeper losses in 2026 before potentially returning to profitability in 2027. The airlines are also continuing to receive deliveries of the COMAC C919 narrow-body jets, although the number of expected deliveries has been adjusted.

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Critics have raised concerns about the potential for aggressive fuel surcharge implementations, suggesting that such measures could lead to demand destruction, particularly in a market where high-speed rail offers a more cost-effective alternative to air travel. The competitive landscape in China's domestic aviation sector remains challenging, with oversupply and price pressures complicating recovery efforts.

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• “The impact of geopolitical conflicts will persist and the overall momentum of global economic growth will remain insufficient,” — China Eastern Airlines

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• “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,” — HSBC Analysts

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As the Iran war continues to influence global oil prices, China's major airlines are navigating a complex landscape marked by rising operational costs and competitive pressures. The outlook for 2026 remains uncertain, with analysts predicting further losses before a potential recovery in the following year.

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