Airlines are struggling but China’s ‘Big Three’ are facing a tougher year than most

China’s major airlines have suffered more than others since the start of the war in Iran, as a combination of heavy factors.

The country’s freight companies — which are set to turn a quarterly profit as early as 2026 — are grappling with high fuel costs and a largely neglected domestic market being eroded by high-speed rail. Jet fuel prices rose after the US and Israel launched an attack on Iran in February.

And while many of its global peers are hedged against fuel price fluctuations, Chinese airlines are blocking less of their fuel purchases, making them vulnerable to a severe blow from long-term increases in oil prices.

The so-called “Big Three” – Air China, China Eastern again China Southern Airlines – together comprise the bulk of domestic power and are expected to record a combined loss of 22 billion yuan ($3.2 billion) in 2026, returning to the red after a profitable first quarter, according to HSBC analysts.

Their share price has fallen nearly 30% since the war began, among the worst performers in the region, according to LSEG data. Singapore Airlines shares fell 9% from Thursday over the same period, Korea Air Lines fell 7%, Japan Airlines 20% off, too ANA Holdings share price 18%.

The rising costs have caused a wave of international and domestic flight cancellations. Many carriers have reduced or suspended international flight services since the outbreak of war. And during the week ending May 14, domestic passenger flights in China fell 12.7% year-on-year while the cancellation rate reached nearly 30%, both worse than seasonal norms, according to Goldman Sachs.

Jet fuel prices have soared around the world after the start of the Iran war, especially in the Asia-Pacific. Platts, Singapore’s widely used jet benchmark, rose from $93 a barrel in late February to $242 a barrel in late March. Prices have since averaged up to $163 per barrel, which is still the highest in the highly concentrated aviation industry.

The Chinese government helps regulate jet fuel prices, although prices are still linked to international crude oil prices. International jet fuel prices rose 74% in April, according to HSBC.

To cope with the situation, many airlines pass the cost on to passengers through higher airfares, fuel costs and higher baggage costs.

Starting April 5, Chinese airlines raised domestic fuel surcharges to 60 yuan for flights under 800 kilometers and 120 yuan for long-haul routes – up from 10 yuan and 20 yuan previously. Further increases took effect on May 16, bringing the short-haul fine to 90 yuan and the long-haul to 170 yuan — a 50% and 42% increase respectively over April’s six-fold adjustment.

But analysts say this will not completely eliminate the fuel price shock.

“The increase in fares required to meet higher fuel costs is too large to be realistically achieved, especially in a very low-cost and competitive environment,” said Jason Sum, an analyst at DBS Group Research.

Chinese carriers can legally pass up to 80% of fuel price increases. However, HSBC estimates that the Big Three probably recover around 60% of these costs.

“In fact, they often choose not to use the full allowance because doing so may reduce demand,” said Parash Jain, global head of transport and logistics research at HSBC.

The bank estimates that every 10% increase in jet fuel prices will increase the combined losses of the Big Three by 2026 by 38%, “continuing to outpace the Big 3 among global peers with greater pricing power and hedging strategies.”

China’s high-speed rail network has also undercut domestic carriers on several key routes, with analysts warning that aggressive fuel prices are looking to wreak havoc and China’s economy is more constrained than most of its peers.

Southeast Asian markets such as Indonesia and the Philippines have cost-conscious travelers but few train options. Although Indonesia has limited fuel surcharges and issued temporary subsidies to cushion the shock, airlines there still have significant pricing power.

Japan and Europe have expanding rail networks, but maintain strong airline pricing power due to strong consumer spending and route economics.

India, with similar demand sensitivity, has seen its aviation sector grow in part because high-speed options are virtually non-existent.

Indian Railways Minister Ashwini Vaishnaw last week warned at a conference that corridors like Mumbai-Pune, Hyderabad-Bengaluru, and Bengaluru-Chennai will be “99% dominated by trains.”

Chinese carriers also have no fuel hedges, leaving them fully exposed to oil price fluctuations.

China Eastern is the only state-owned Big Three carrier to manage aviation fuel price risk in 2025. Even that position was small, according to DBS’s Sum. Air China and China Southern entered the fuel shock without hedging.

That puts Chinese carriers at a disadvantage compared to better-fenced international peers. Singapore Airlines booked a S$218 million ($170 million) profit on fuel in the second half of its financial year ending March 31.

Hedging is not helping with the jet fuel shortage, which is hitting Asian carriers the hardest, Willie Walsh, head of the International Air Transport Association, told CNBC in April. Chinese carriers are not as affected by the shortage as other Asian airlines, however, due to the country’s large oil reserves and status as an aviation fuel filter and exporter.

As for which Asian airlines suffer the most, it may be a toss-up between Indian and Chinese airlines.

“In the near term, Indian airlines appear to be more vulnerable due to weak liquidity and greater exposure to the Middle East region,” HSBC’s Jain said. “However, in the medium term, we think the Chinese carriers are in a worse position. Indian airlines face less direct rail replacement and may pass on additional fuel costs.”

Also, Chinese carriers are finally supported by the Chinese government.

“Public companies will remain strong and can continue to raise equity to support their balance sheets, making them less vulnerable to bankruptcy than similarly exposed private companies,” Jain said.