China's airline industry is facing a challenging period, with its stocks taking a significant hit since the Iran war began. This is due to a combination of factors, including rising fuel costs and a domestic market that is being eroded by high-speed rail. While many global airlines are hedged against fuel price fluctuations, Chinese carriers are not, leaving them vulnerable to the impact of prolonged oil price increases. The 'Big Three' airlines, which account for the majority of domestic capacity, are expected to incur substantial losses in 2026, with their share prices falling by around 30% since the war started. This is in stark contrast to their global peers, whose shares have seen more modest declines.
One of the key issues is the lack of fuel hedges for Chinese airlines. While Singapore Airlines, for instance, booked a significant gain from fuel hedging in the second half of its financial year, Chinese carriers have not been as proactive in this area. This leaves them exposed to the volatility of oil prices, which has led to a surge in jet fuel costs worldwide, particularly in the Asia-Pacific region. The Chinese government does regulate jet fuel rates, but prices are still linked to international crude oil rates, and ex-factory jet fuel rates in China surged by 74% in April.
To cope with these rising costs, Chinese airlines have been raising domestic fuel surcharges, but analysts warn that these increases may not be enough to offset the fuel cost shock. The fare increases required to fully absorb higher fuel expenses are too large to be realistically achieved, especially in a highly price-sensitive and competitive environment. Chinese carriers can legally pass through up to 80% of fuel-price increases, but HSBC estimates that the Big Three are likely only recouping around 60% of these costs. This is because they often choose not to use the full allowance, as doing so could materially weaken demand.
The expanding high-speed rail network in China is also a significant factor in the decline of domestic carriers. This network undercuts domestic airlines on prices across many key routes, and analysts warn that aggressive fuel surcharges risk demand destruction. China faces this constraint more acutely than most peers, as Southeast Asian markets like Indonesia and the Philippines have cost-conscious travelers but minimal rail alternatives. In contrast, Japan and Europe have expansive rail networks, but retain stronger airline pricing power due to stronger consumer spending power and route economics.
Indian airlines, which have similar demand sensitivity, have seen their sector boom partly because high-speed rail options barely exist. The Indian Railways Minister has warned that corridors such as Mumbai-Pune, Hyderabad-Bengaluru, and Bengaluru-Chennai would become '99% dominated by railways'. This highlights the vulnerability of Chinese carriers to rail competition, which may be less of an issue for Indian airlines.
In conclusion, the Chinese airline industry is facing a perfect storm of challenges, including rising fuel costs, a price-wary domestic market, and aggressive competition from high-speed rail. While the industry may be resilient due to the backing of the Chinese government, the near-term outlook is uncertain. The question remains: who will suffer the most in the long run? In my opinion, the answer lies in the ability of Chinese carriers to adapt to the changing landscape and find innovative solutions to the challenges they face.
