Oil prices surge, triggering alarms in the global airline industry. Cathay Pacific's fuel surcharge increases by over 100%.

(Source: Bay Area Finance Media)

At 24:00 on March 23, domestic refined oil prices will be raised. The increase in gasoline prices is driven by the continuously rising international crude oil prices—since March, the risk of shipping disruptions in the Strait of Hormuz has pushed Brent crude oil prices above $110 per barrel. Jet fuel has also been affected, with the jet fuel crack spread soaring above $100 per barrel at one point.

For airlines, this is like a “stress test” on the cost side. Just days before the refined oil price increase, Cathay Pacific has already taken action: the fuel surcharge for long-haul flights originating from Hong Kong has been raised from HKD 569 to HKD 1,164, an increase of over 100%. Hong Kong Airlines, Air India, and Japan Airlines followed suit, and many domestic airlines also adjusted their international route fuel surcharges in quick succession.

This reflects the pressure of high international oil prices in 2026. Increasing fuel surcharges is the most direct cost transfer method. However, several industry insiders told the “Daily Economic News” that this mechanism has limited effectiveness in practice—when passengers book tickets, they consider ticket prices, fuel surcharges, and other fees as a whole. Airlines and modes of travel are not the only choices, which restricts the increase in fuel surcharges.

Therefore, from Cathay Pacific hedging 30% of its fuel costs, to China Eastern Airlines announcing plans to conduct jet fuel hedging, to United Airlines announcing a 5% reduction in capacity and suspending inefficient routes… airlines’ response strategies go far beyond just “raising prices.”

Reducing capacity, raising ticket prices, increasing fuel fees

The airline industry faces severe cost pressures

Faced with a sharp rise in fuel costs, some airlines have chosen to reduce capacity to control losses.

The CEO of United Airlines once stated that if fuel costs remain high, airlines would rather give up some business demand than operate loss-making routes. Recently, the airline announced it would reduce scheduled flights by 5% in the second and third quarters, stating that if oil prices continue to stay high, its annual aviation fuel expenditures would increase by $11 billion.

Air New Zealand and Scandinavian Airlines have also announced flight reduction plans. Additionally, Vietnamese authorities have reminded the country’s aviation industry to prepare for potential flight reductions starting in April due to heightened risks of fuel supply shortages.

Meanwhile, airlines around the world are raising fuel surcharges or directly increasing ticket prices.

Cathay Pacific has significantly raised its fuel surcharge from March 18. For long-haul flights originating from Hong Kong to North America, Europe, the Middle East, and Africa, the fuel fee has increased from HKD 569 to HKD 1,164, more than doubling.

Hong Kong Airlines has also raised its fuel surcharge, increasing it to HKD 290 for short-haul flights to Asia; for long-haul flights to Europe, Africa, and the Middle East, it has also increased to HKD 1,164. Air India has announced a phased increase in fuel surcharges for domestic and international routes. Japan Airlines has stated that due to the continuous rise in costs putting pressure on company profits, it is considering imposing fuel surcharges on domestic flights.

In addition, Air India has raised long-haul ticket prices by 15% and is considering further increases. Thai Airways plans to increase ticket prices by 10% to 15% to cover soaring fuel costs. Air New Zealand has increased ticket prices for its domestic and international routes and has indicated that if aviation fuel costs remain high, it may further adjust ticket prices and flight schedules in the future. Air France-KLM has decided to raise ticket prices for long-haul flights, citing recent price increases by Scandinavian Airlines and Air India as a model.

Many domestic airlines have also adjusted their fuel surcharges for certain international routes.

Juneyao Airlines has raised fuel surcharges for routes between China and Finland, between China and Southeast Asian countries, and between China and Australia; Spring Airlines’ fee adjustments mainly concern routes to Japan, South Korea, Thailand, Vietnam, and Malaysia; Chenglong Airlines has adjusted fuel surcharges for routes between China and Thailand, Singapore, Malaysia, and Kazakhstan.

On domestic routes, the standard set after the reduction on January 5, 2026, is still in effect: for segments of 800 kilometers (inclusive) or less, a charge of 10 yuan per passenger, and for segments over 800 kilometers, a charge of 20 yuan. However, there are voices suggesting that if international oil prices continue to remain high, there may be a possibility of raising fuel surcharges on domestic routes.

Jet fuel generally accounts for about 30% of airlines’ operating costs

The airline industry’s sensitivity to oil prices is first reflected in its cost structure. Senior civil aviation expert and professor at Guangdong University of Foreign Studies, Guo Jia, explained that for major airlines, the cost proportion of jet fuel varies, but it usually accounts for about 30% of operating costs.

According to my research, in 2024, the aviation fuel costs of Air China, China Eastern Airlines, and China Southern Airlines are 53.72 billion yuan, 45.49 billion yuan, and 54.99 billion yuan, respectively, accounting for 33.96%, 35.97%, and 34.46% of total costs. Additionally, according to the “Mid-term Credit Observation of the Chinese Civil Aviation Industry 2025,” the proportion of jet fuel costs in the operating costs of the civil aviation transportation industry from 2022 to the first half of 2025 is 29.29%, 35.58%, 34.72%, and 32.13% (the semi-annual data excludes Huaxia Airlines).

To alleviate the cost pressure from rising oil prices, domestic routes have established a fuel surcharge linkage mechanism. According to current regulations, when the comprehensive procurement cost of domestic aviation kerosene exceeds 5,000 yuan per ton, airlines can impose surcharges according to a formula. According to estimates by China Merchants Securities, assuming Brent crude oil is at $80 per barrel and Singapore jet fuel is at $110 per barrel, the corresponding average surcharge is about 72 yuan per person, which statically covers a significant portion of jet fuel costs.

However, in reality, in a highly market-oriented civil aviation market, when jet fuel prices soar, the resulting cost increases are difficult to effectively pass on to consumers.

Guo Jia mentioned in an interview that while airlines raise surcharges, they often need to reduce base ticket prices to maintain passenger overall travel costs, which significantly diminishes the hedging effect of surcharges, “because passengers pay a total cost—ticket price plus fuel surcharge. If the total price is significantly higher than high-speed rail, passengers may choose not to fly.”

This situation also exists on international routes. Li Xiaojin, director of the Aviation Economics and Development Research Institute at Civil Aviation University of China, analyzed that while airlines can significantly increase fuel surcharges to compensate for fuel cost increases to some extent, this measure has its limits. “If the total cost is too high, exceeding consumers’ affordability, passengers may choose alternative international flights from other airlines, which restricts the increase in fuel surcharges,” he said.

Of course, under different market conditions, changes in fuel surcharges have varying impacts on corporate performance. When demand is strong and jet fuel prices rise, airlines can absorb some costs. However, when high oil prices coincide with weak demand, industry losses can further expand. Looking back at the comparisons of the last two high oil price cycles is more convincing.

According to a research report by China Merchants Securities, in 2018, the average price of Brent crude oil rose from $55 per barrel to $72 per barrel, an increase of 31%. That year, the average fuel surcharge for domestic routes was 11 yuan per person, contributing to a ticket price increase of about 1.4%. However, benefiting from domestic ticket price reforms and the lifting of price caps, the overall revenue levels of the three major airlines improved, and even after excluding fuel surcharges, remained roughly flat year-on-year, resulting in a slight improvement in profits after currency exchange adjustments.

However, the situation in 2022 was completely different. The combination of the Russia-Ukraine conflict and the slow recovery of global refining capacity led to a 40% increase in Brent crude oil prices and a staggering 70% increase in the average price of Singapore jet fuel. That year, the average fuel surcharge rose to 96 yuan per person, contributing to a ticket price increase of 12% to 13%. However, under the special circumstances at that time, the domestic passenger turnover of the three major airlines fell by 40% year-on-year, and the base ticket price decreased instead of increasing after excluding fuel surcharges.

Airlines’ response strategies go far beyond just “raising prices”

In this context, airlines are adopting multidimensional response strategies.

Raising fuel surcharges is the most direct cost transfer method. However, relying solely on surcharges is no longer sufficient to fully cover the skyrocketing costs, especially in extreme market conditions with sharp fluctuations in oil prices. Thus, futures and derivatives hedging is becoming a “ballast” for airlines to stabilize operations.

China Eastern Airlines recently announced that aviation fuel, as one of the company’s largest operating costs, has significant implications for the company’s profitability due to price fluctuations. The company plans to conduct aviation fuel hedging in 2026 to partially offset the adverse effects of oil price fluctuations on its operations. Cathay Pacific revealed that approximately 30% of its fuel has been hedged for 2026, while Finnair’s hedging ratio exceeded 80% in the first quarter.

In this regard, Li Xiaojin cautions that airlines engaging in fuel hedging should be wary of potential risks. If costs are locked in at current prices, any future drop in oil prices could turn hedging into a burden. There have been many historical lessons where blind operations led to losses. A more prudent approach is to participate moderately: utilizing hedging to counter short-term oil price fluctuations to avoid cost spikes, while not making a full bet, thereby retaining flexibility for adjustments. By reasonably balancing risks and returns, airlines can control risks while maintaining cost stability and market responsiveness.

When oil prices remain above $100 per barrel for an extended period, airlines begin to adopt more aggressive capacity adjustments. United Airlines has explicitly stated that to cope with high oil prices potentially lasting until the end of 2027, it will reduce capacity by about 5% in the second and third quarters, suspending inefficient routes to Tel Aviv and Dubai while concentrating resources in high-profit markets. This “retreat to advance” strategy aims to maintain ticket price levels and load factors by contracting supply, ensuring cash flow safety. Cathay Pacific has also pointed out that while experiencing cost losses, it aims to flexibly adjust its network to respond to the demand overflow arising from the capacity vacuum in the Middle East, striving to balance profits and losses dynamically.

Interestingly, the high oil price cycle has unexpectedly accelerated the aviation industry’s green transformation. The year 2025 is seen as the “mandatory year” for global SAF (Sustainable Aviation Fuel) by the industry, with the EU’s ReFuel EU Aviation regulation requiring a SAF blending ratio of 2% by 2025 and rising to 6% by 2030; China, in its 2026 government work report, has also listed “green fuels” as a new growth point for the first time.

However, it should be noted that SAF costs several times more than traditional jet fuel. Based on this, the industry is actively exploring cost-sharing mechanisms. In March of this year, the first commercial demonstration project in China covering the entire supply chain of SAF, called the “Spark Project,” was launched in Chengdu, with participation from China Southern Airlines, Sichuan Airlines, and others. This project has, for the first time, realized the cross-industry circulation and value transformation of SAF environmental rights, allowing companies purchasing SAF emission reduction rights to share the premium costs, providing a replicable “Chinese solution” for the large-scale application of SAF. With the implementation of the EU’s mandatory regulations and the deepening of China’s “dual carbon” goals, the application ratio of SAF is expected to rise rapidly, which may be a necessary path for the aviation industry to reshape its cost structure and reduce its dependence on fossil fuels.

Li Xiaojin explained that SAF not only promotes energy conservation and emissions reduction but also reduces China’s civil aviation’s dependence on imported fuel, which should be elevated to ensure national energy security and increase the push for advancement.