International Oil Prices Fluctuate Sharply, Airlines Launch Defensive Campaign

Securities Times Reporter Wang Xiaowei

The ongoing Middle East conflict risks continue to prolong, and the global aviation industry is once again tightening its nerves—amid sharp fluctuations in international oil prices, some airlines’ smooth operations this year have been disrupted. A “stress test” from rising costs has suddenly arrived amid geopolitical storms.

Recently, starting with Cathay Pacific, many international and domestic airlines have successively increased fuel surcharges on international routes. Strategies such as fuel hedging, capacity reduction, and suspension of inefficient routes have also been introduced intensively. Under the dual pressures of controlling costs and shifting strategies, airlines’ “cost balance defense battle” has already begun.

Faced with demand constraints and cost shocks, airlines’ responses show some passivity. Industry insiders worry that some coping strategies may not be fully effective. How to walk steadily on the narrow balance beam of costs tests the industry’s resilience and operational wisdom.

Oil “eats up” 30% of revenue

“Previously, we also experienced the impact of international turmoil on costs, but we didn’t expect this round of oil price volatility to be so intense,” a state-owned airline insider told Securities Times. “Recently, we’ve been estimating the potential changes in fuel costs from Sinopec’s restructuring of aviation fuel, but the sudden international oil price shock is clearly more damaging.”

Jet fuel is the largest operating cost for airlines. According to 2024 financial reports, Air China (601111), China Eastern Airlines, and China Southern Airlines (600029) each spend roughly 34-35% of their total costs on aviation fuel. In other words, for every 100 yuan earned, about 34 yuan is “burned” in the tank.

This cost structure makes airlines extremely sensitive to oil price fluctuations. Air China’s semi-annual report for 2025 disclosed that, all other variables remaining constant, a 5% increase or decrease in the average jet fuel price would change their fuel costs by about 1.216 billion yuan. Since the Middle East conflict, international oil prices have surged over 50%, implying that airlines could face cost shocks in the hundreds of billions of yuan.

According to Huatai Securities (601688), if Brent crude rises from $60 to $100 per barrel and the jet fuel spread widens from $20 to $40 per barrel, the price of aviation kerosene is expected to increase by about 3,767 yuan per ton (+75%), with cost increases accounting for 21.8% of the three major airlines’ average shipping prices.

Why are some airlines more anxious about this round of oil price fluctuations? The reason lies in the structural characteristics of this price increase.

Nearly 60% of crude oil exported from the Persian Gulf is medium and heavy crude, which are key raw materials for producing aviation fuel. There are very limited alternative sources outside the Middle East. The aforementioned airline insider believes, “The impact of the Middle East conflict on aviation fuel and diesel products is greater than on crude oil itself—even if crude oil prices retreat, aviation fuel may still remain at high levels.”

Morgan Stanley analysts also pointed out that airlines face risks not only from rising crude oil prices but also from the widening gap between crude benchmark prices and aviation fuel prices, which poses a severe challenge to cost control.

Price hikes, hedging, and capacity adjustments

Amid rising costs, airlines are collectively raising prices, with significant adjustments in route coverage and scope.

Increasing fuel surcharges is the most direct approach. Starting with Cathay Pacific, many international and domestic airlines have raised fuel surcharges on international routes, with some even doubling the surcharge.

For domestic routes, fuel surcharges are linked to aviation kerosene prices. The aforementioned airline insider said the next adjustment window for domestic route fuel surcharges is early April. “If international oil prices stay high, there is a possibility of further increases.”

Civil aviation expert Wang Jia believes, “This shows that airlines have the ability and tools to pass on costs, but this capacity has a ceiling. After all, passengers pay the overall cost (ticket price plus fuel surcharge). If it becomes too high, it will affect their choice of travel mode and willingness to travel. Some airlines may raise surcharges while lowering the base ticket prices.”

Industry practice shows that when demand is strong and fuel prices rise, airlines have a stronger ability to absorb costs; when high oil prices coincide with weak demand, the industry often faces increased losses. In recent years, the Russia-Ukraine conflict, coupled with delayed global refining capacity recovery, caused Brent crude and Singapore jet fuel prices to rise together. Under weak demand, the three major airlines’ domestic passenger turnover fell by 40% year-on-year. Excluding fuel surcharges, base fares did not rise but fell, leading to industry-wide losses until recent years when the situation slowly improved.

So far, the aviation industry remains optimistic about demand growth. The International Air Transport Association (IATA) forecasts that by 2050, global air passenger demand will more than double the current level. Under a moderate growth scenario, demand is expected to reach 20.8 trillion RPK (revenue passenger kilometers), with a CAGR (compound annual growth rate) of 3.1% from 2024 to 2050.

IATA Director Willie Walsh said, “The outlook for air travel is generally positive, which is beneficial for the global economy and social development—growth in the aviation industry will create opportunities including employment worldwide.”

Many airlines are also seeking to leverage financial instruments. In January, China Eastern Airlines’ board approved plans to develop jet fuel hedging business by 2026, focusing on currency and fuel hedging. Cathay Pacific previously disclosed that about 30% of its fuel was hedged by 2026; Finnair’s first-quarter hedging ratio exceeded 80%, demonstrating efforts by domestic and international airlines to lock in costs and smooth out cycle fluctuations through financial derivatives.

In terms of routes, some airlines are also doing “downsizing.” United Airlines recently announced that to cope with potentially sustained high fuel prices until late 2027, it will cut capacity by about 5% in Q2 and Q3, focusing resources on high-profit markets.

Wang Jia said that when oil prices stay above $100 per barrel for a long time, financial hedging alone is often insufficient to manage cost risks, and capacity adjustments become more necessary. If international oil prices remain high, more aggressive capacity concentration strategies may be adopted.

Finding balance amid the “stress test”

Rising oil prices often boost stocks of electric vehicle companies like BYD (002594). Similarly, the consensus in the aviation industry is that high oil price cycles will accelerate the industry’s green transformation.

The 2026 government work report in China first listed “green fuels” as a new growth point, seen as a key driver for SAF (sustainable aviation fuel) development. “SAF not only promotes energy saving and emission reduction but also reduces China’s civil aviation reliance on imported fuel. Increasing SAF usage will be an essential path for the industry to reshape its cost structure and break free from fossil fuel dependence,” Wang Jia believes.

However, in the short term, high-profile segments cannot outweigh the overall industry anxiety.

Since last year, the civil aviation industry has shown a significant recovery, with increased total industry transport turnover. State-owned airlines have greatly reduced losses, with China Southern Airlines leading the way to return to profit for the full year, with an estimated net profit attributable to the parent of 800 million to 1 billion yuan. But this warmth is now challenged by the 2026 oil price shock.

Most airline annual reports are yet to be released. Wang Jia analyzed, “Last year’s operations saw important support from cargo, airport services, and fuel and materials. When oil prices stay high and passenger demand fluctuates, airlines’ cost pressures may become more prominent.”

He categorized airlines’ responses to the international oil price shock into four types: fuel surcharges as front-end price signals, hedging as mid-office financial tools, capacity adjustments as back-end operational strategies, and green transformation as a long-term strategic layout. “No single measure can solve all problems alone, but combined, they form a comprehensive defense line against high oil prices.”

However, airlines caught in cost battles feel that walking this balance beam is difficult. The aforementioned state-owned airline insider gave examples: raising surcharges may suppress demand; hedging may lead to losses; capacity cuts may lose market share; green transformation may increase short-term costs.

“For upstream producers or oil companies, hedging helps lock in future sales prices; but for airlines on the demand side, it’s a different consideration. Recently, some airlines experienced a rapid drop in oil prices after hedging, meaning their actual procurement costs are higher than current market prices, and hedging can increase opportunity costs. There are many lessons from history,” he said.

Industry consensus is that airlines need to find new balance amid this “stress test.” Take China Eastern Airlines as an example: the company has set a mandatory stop-loss line in its hedging operations, with a task force closely monitoring fair value changes and risk exposure. Moderate participation and strict risk control reflect the cautious stance of airlines in highly volatile markets.

Wang Jia believes this also demonstrates airlines’ efforts in operational refinement. “In recent years, airlines have shifted from extensive expansion to refined operations, with many capacity adjustments ‘both preserve and compress.’ This recent cost shock will accelerate their pursuit of finer management.”

In spring 2026, the waves in the Strait of Hormuz remain unsettled, oil prices continue to fluctuate at high levels, and the spillover effects on airlines will persist. Airlines may deploy more response strategies. “There’s no choice—this is essential for survival and a necessary step for industry advancement and competition,” said the airline insider.