International Oil Prices Plunge! Out of 100 Yuan Revenue, Jet Fuel "Consumes" Over 30 Yuan! Airlines Launch "Cost Balance Defense Battle"

The ongoing Middle East conflict continues to prolong risks, causing the global aviation industry to tighten its nerves once again—under the intense fluctuations of international oil prices, some airlines’ steady operational rhythms this year have been disrupted. A sudden “stress test” from rising costs has 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 implemented intensively. Facing both cost control and shifting strategies, airlines’ “cost balance defense battle” has already begun.

Under the dual pressures of demand constraints and rising costs, 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.

Image source: TuChong Creative

Oil “eats up” 30% of revenue

“We’ve experienced the impact of international geopolitical turmoil on costs before, 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 due to 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, the proportion of aviation fuel costs to total costs for Air China, China Eastern, and China Southern is roughly 34%–35%. 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. China National Aviation’s 2025 semi-annual report disclosed that, all other variables remaining constant, a 5% increase or decrease in the average jet fuel price would result in a roughly 1.216 billion yuan change in jet fuel costs. Since the Middle East conflict, international oil prices have surged by over 50%, implying that airlines could face cost shocks in the hundreds of billions of yuan.

According to Huatai Securities estimates, 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 average shipping prices of the three major carriers.

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. The market options outside the Middle East are very limited. 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 prices pull back, aviation fuel may still remain at high levels.”

Morgan Stanley analysts also pointed out that the risks faced by airlines are not only rising crude oil prices but also 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 go hand in hand

Amid soaring costs, airlines are collectively raising prices, with routes covering a broad scope and significant adjustments.

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 surcharges doubling.

For domestic routes, fuel surcharges are linked to aviation kerosene prices. The aforementioned 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 costs on, 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 travel choices and willingness. Some airlines may raise surcharges while lowering base fares.”

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 combined with delayed global refining capacity recovery led to simultaneous rises in Brent crude and Singapore jet fuel prices. Under weak demand, the domestic passenger volume of the Big Three airlines dropped by 40% year-on-year. Excluding fuel surcharges, base fares actually decreased, deepening industry losses until recent years when a slow recovery began.

So far, the industry remains optimistic about demand growth. IATA forecasts that by 2050, global air passenger demand will more than double current levels. 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.

Willie Walsh, Director General of IATA, 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 worldwide, including employment.”

Many airlines are also seeking to leverage financial instruments. In January, China Eastern’s board approved plans to develop jet fuel hedging business by 2026, focusing on currency and fuel hedging. Cathay Pacific previously revealed 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.

Some airlines are also doing “downsizing” on routes. United Airlines recently announced that to cope with potentially sustained high fuel prices until the end of 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 focusing strategies may be introduced.

“Stress test” seeking balance

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

The 2026 government work report for 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 dependence 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 reliance,” Wang Jia believes.

However, in the short term, industry-wide anxiety still outweighs the spotlight on specific segments.

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

Most airlines have not yet released their annual reports. Wang Jia analyzed, “Last year, cargo, airport services, and fuel and materials all played important supporting roles. When oil prices are high and passenger demand fluctuates, airlines’ cost pressures may become more prominent.”

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

However, airlines caught in the cost game feel that walking this balance beam is challenging. The aforementioned insider from a state-owned airline gave an example: raising surcharges may suppress demand, hedging may lead to losses, capacity cuts may lose market share, and green transformation may increase short-term costs.

“For upstream producers or oil companies, hedging helps lock in future sales prices; but for airlines, as demand side players, the considerations are different. Recently, some airlines experienced a sharp drop in oil prices after hedging, which means their actual procurement costs are higher than current market prices—making the hedge a source of opportunity cost. There are many lessons from history,” he said.

Industry consensus is that airlines need to find a new balance in this “stress test.” Take China Eastern as an example: the airline sets strict stop-loss lines in its hedging operations, with teams closely monitoring fair value changes and risk exposures. Moderate participation and strict risk control reflect a cautious stance in volatile markets.

Wang Jia sees this as also representing 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 operational management.”

In spring 2026, the waves in the Strait of Hormuz are far from calming, oil prices remain volatile at high levels, and the spillover effects on airlines will continue. Airlines may deploy more response strategies. “There’s no other way—this is essential for survival and a necessary step for industry advancement and competition,” the insider concluded.