High Oil Prices "Weigh Heavy" on Aviation Industry: Some Airlines' Fuel Surcharges Up Over 100%, Airline Fuel Costs Exceed 30% of Total – Can Price Increases Offset This?

China’s domestic refined oil prices will increase at 24:00 on March 23. The rise in gasoline prices is driven by the sustained increase in international crude oil—since March, the risk of shipping disruptions through the Strait of Hormuz has pushed Brent crude oil prices above $110 per barrel. Jet fuel has also not been spared, with the crack spread reaching over $100 per barrel at times.

For airlines, this is essentially a “stress test” on costs. Just days before the fuel price hike, Cathay Pacific took the lead: the fuel surcharge for long-haul flights departing from Hong Kong was raised from 569 HKD to 1,164 HKD, an increase of over 100%. Hong Kong Airlines, Air India, Japan Airlines followed suit, and many domestic airlines also adjusted their international route fuel surcharges.

This is a snapshot of the high-pressure environment caused by high international oil prices in 2026. Increasing fuel surcharges is the most direct way to pass on costs. However, industry insiders told the Daily Economic News that this mechanism has limited effectiveness in practice—passengers consider total ticket price, fuel surcharges, and other fees when purchasing tickets, and airlines and travel modes are not the only options. This constrains the ability to fully pass on fuel costs through surcharges.

As a result, strategies such as Cathay Pacific hedging 30% of its fuel costs, China Eastern Airlines announcing plans to engage in fuel hedging, United Airlines reducing capacity by 5%, and suspending inefficient routes—airlines’ responses go far beyond just raising prices.

Reducing capacity, raising ticket prices, and increasing fuel surcharges, the airline industry faces heavy cost pressures

In response to soaring fuel costs, some airlines are cutting capacity to control losses.

United Airlines CEO recently stated that if fuel costs remain high, airlines would rather give up some demand than operate unprofitable routes. The airline announced it would cut 5% of its scheduled flights in Q2 and Q3, and if oil prices stay high, its annual fuel expenditure could increase by $11 billion.

Air New Zealand and Scandinavian Airlines also announced flight reductions. Additionally, Vietnamese authorities have warned the industry to prepare for possible flight cuts starting in April due to increased risks of fuel supply shortages.

Meanwhile, airlines worldwide are raising fuel surcharges or ticket prices directly.

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

Hong Kong Airlines also increased surcharges: short-haul flights from Hong Kong to Asia now cost 290 HKD; long-haul flights to Europe, America, Africa, and the Middle East increased to 1,164 HKD. Air India announced phased increases in fuel surcharges for domestic and international routes. Japan Airlines said that due to ongoing cost pressures, it is considering imposing fuel surcharges on domestic flights.

Additionally, Air India has raised long-haul ticket prices by 15% and is considering further increases. Thai Airways plans to raise fares by 10-15% to cover soaring fuel costs. Air New Zealand has increased both domestic and international fares and indicated that if fuel costs remain high, further adjustments to fares and flight schedules may follow. KLM and Air France have also decided to raise long-haul ticket prices, citing recent fare hikes by Scandinavian Airlines and Air India as models.

Several domestic airlines have also adjusted fuel surcharges on some international routes.

Juneyao Airlines increased surcharges for routes between China and Finland, China and Southeast Asian countries, and China and Australia; Spring Airlines mainly adjusted fees for routes to Japan, Korea, Thailand, Vietnam, and Malaysia; and Chenglong Airlines adjusted fuel surcharges for routes between China and Thailand, Singapore, Malaysia, and Kazakhstan.

For domestic routes, the current standard remains the one implemented after January 5, 2026: 10 RMB per passenger for segments of 800 km or less, and 20 RMB for segments over 800 km. However, some industry voices suggest that if international oil prices stay high, domestic fuel surcharges may also be increased.

Jet fuel accounts for about 30% of airline operating costs

Airlines’ sensitivity to oil prices is primarily reflected in their cost structure. Senior civil aviation expert and professor at South China University of Business, Guo Jia, explained that the proportion of fuel costs varies among airlines but generally accounts for about 30% of operating costs.

Data shows that in 2024, the fuel costs for Air China, China Eastern, and China Southern were 53.72 billion RMB, 45.50 billion RMB, and 54.99 billion RMB respectively, representing approximately 34-36% of their total costs. Additionally, according to the China Civil Aviation Industry Mid-Year Credit Review 2025, from 2022 to mid-2025, the proportion of fuel costs in operating expenses for sample airlines was 29.29%, 35.58%, 34.72%, and 32.13% (excluding Huaxia Airlines in the semi-annual data).

To mitigate the impact of rising fuel prices, domestic routes have established a fuel surcharge linkage mechanism. According to current rules, when the total procurement cost of aviation kerosene exceeds 5,000 RMB per ton, airlines can levy surcharges based on a formula. CICC Securities estimates that assuming Brent crude at $80 per barrel and Singapore jet fuel at $110 per barrel, the average surcharge would be about 72 RMB per passenger, which provides a relatively high coverage of fuel costs in static terms.

However, in a highly market-driven civil aviation market, when fuel prices surge, the increased costs are difficult to fully pass on to consumers.

Guo Jia explained that when airlines raise surcharges, they often need to lower base ticket prices to keep overall travel costs stable, which diminishes the hedging effect of surcharges. “Because passengers pay the total cost—ticket price plus fuel surcharge. If the total price is significantly higher than high-speed rail, passengers might choose not to fly.”

The same applies to international routes. Li Xiaojin, director of the Aviation Economics and Development Research Institute at Civil Aviation University of China, said that while airlines can significantly increase fuel surcharges to partly offset rising fuel costs, there is a limit. “If the total cost becomes too high and exceeds what consumers can bear, passengers will choose other airlines’ international routes, which constrains the increase of fuel surcharges,” he said.

Of course, the impact of fuel surcharge changes on airline performance varies across different market environments. When demand is strong and fuel prices rise, airlines have some capacity to absorb costs. But when high oil prices coincide with weak demand, industry losses tend to deepen. Comparing recent cycles of high oil prices is instructive.

According to CICC Securities, in 2018, Brent crude averaged $55 per barrel, rising 31% to $72. In that year, the average fuel surcharge for domestic routes was 11 RMB per person, contributing about 1.4% to fare increases. Thanks to fare reforms and the lifting of fare caps, the three major airlines saw overall domestic revenue improve, and excluding fuel surcharges, profits remained flat or slightly increased, with a small improvement after currency adjustments.

In stark contrast, 2022 saw a different picture. The Russia-Ukraine conflict and delayed global refining capacity recovery caused Brent crude to rise 40%, and Singapore jet fuel prices surged by 70%. The average fuel surcharge increased to 96 RMB per person, contributing 12-13% to fare increases. However, due to the special circumstances, domestic passenger volume for the three major airlines dropped by 40% year-on-year, and excluding fuel surcharges, base fares actually declined.

Airlines’ strategies go far beyond just raising prices

In this context, airlines are adopting multi-faceted strategies.

Raising fuel surcharges is the most direct way to pass on costs. However, relying solely on surcharges cannot fully cover the surge in costs, especially in extreme market conditions with volatile oil prices. Therefore, futures and derivatives hedging have become a “stabilizer” for airline operations.

China Eastern recently announced that, as fuel is one of the company’s largest operating costs, its fluctuations significantly impact performance. The airline plans to develop fuel hedging business by 2026 to partially hedge against oil price volatility. Cathay Pacific disclosed that about 30% of its fuel was hedged in 2026, and Finnair’s hedge ratio in Q1 exceeded 80%.

Li Xiaojin warned that airlines need to be cautious with fuel hedging. Locking in costs at current prices can backfire if future oil prices fall, turning hedging into a burden. Past lessons show that blind hedging can cause losses. A more prudent approach is moderate participation: using hedging to offset short-term price fluctuations and avoid sudden cost spikes, while maintaining flexibility to adjust. Balancing risks and returns helps control costs and enhances market responsiveness.

When oil prices stay above $100 per barrel long-term, airlines tend to adopt more aggressive capacity adjustments. United Airlines announced it would cut about 5% capacity in Q2 and Q3, suspend low-profit routes like Tel Aviv and Dubai, and focus resources on high-margin markets. This “retreat to advance” strategy aims to maintain fare levels and load factors through supply contraction, ensuring cash flow safety. Cathay Pacific also noted that, amid cost pressures, it would flexibly adjust its network to address demand spillover caused by Middle East capacity gaps, seeking to balance profits and losses dynamically.

Interestingly, high oil prices have accelerated the aviation industry’s green transformation. 2025 is seen as the “mandatory year” for global SAF (Sustainable Aviation Fuel) mandates. The EU ReFuel EU Aviation regulation requires a 2% blending ratio in 2025, rising to 6% by 2030; China’s government work report in 2026 first listed “green fuels” as a new growth point.

However, SAF costs are several times higher than traditional jet fuel. Industry chains are actively exploring cost-sharing mechanisms. In March, China’s first full-chain SAF commercial demonstration project, the “Spark Project,” launched in Chengdu, involving airlines like China Southern and Sichuan Airlines. It achieved cross-industry circulation of environmental credits for SAF, allowing companies purchasing emission reduction rights to share the premium costs, providing a replicable “Chinese solution” for large-scale SAF adoption. With EU mandates and China’s “dual carbon” goals deepening, SAF application is expected to grow rapidly, potentially reshaping airline cost structures and reducing fossil fuel dependence.

Li Xiaojin emphasized that SAF not only promotes energy saving and emission reduction but also reduces China’s civil aviation reliance on imported fuel, and should be elevated to a level that ensures national energy security, with increased support.

Daily Economic News