Cathay Pacific Haitong: The National Development and Reform Commission adjusts the pressure on jet fuel, and the geopolitical oil prices do not change the long-term logic of the aviation super cycle

Cathay Securities and Haitong released a research report stating that, with the recent escalation of Middle East tensions and the blockage of the Strait of Hormuz, international crude oil prices surged significantly in early March. In April, the National Development and Reform Commission (NDRC) also implemented controls on domestic jet fuel ex-factory prices, with estimated actual adjustments exceeding 1,000 yuan less than the formula calculation. Although up over 70% year-on-year, the oil price pressure on Chinese airlines is markedly less than that on overseas carriers. Ensuring supply will significantly enhance the competitiveness of Chinese airlines on international routes. The NDRC’s regulation of jet fuel prices, combined with unchanged geopolitical oil prices, maintains the long-term logic of the aviation super cycle. It is recommended to seize this rare countercyclical opportunity.

Cathay Securities and Haitong’s main points are as follows:

The NDRC’s regulation of domestic jet fuel price increases eases airline cost pressures and boosts international competitiveness

Based on the domestic jet fuel ex-factory pricing mechanism, linked to the Singapore jet fuel average price from the previous month, the NDRC determined the adjustment at the beginning of the month using a formula. Recently, with the escalation of Middle East tensions and the blockage of the Strait of Hormuz, international crude oil prices surged sharply from early March 2026, and Singapore jet fuel prices soared even more due to direct supply chain disruptions.

In 2016, the NDRC issued the “Oil Price Management Measures,” clarifying that in cases of abnormal fluctuations in international oil prices or other special circumstances, the NDRC, with approval from the State Council, can suspend, delay, or reduce price adjustments. On March 23, 2026, the NDRC temporarily regulated domestic gasoline/diesel prices, effectively reducing the adjustment by over 1,000 yuan compared to the formula calculation. In April 2026, the NDRC also regulated domestic jet fuel ex-factory prices, with an estimated actual adjustment also over 1,000 yuan less than the formula, despite a year-on-year increase of over 70%. This regulation reduces the pressure on oil prices compared to overseas airlines and ensures supply, which will significantly improve the international route competitiveness of Chinese airlines.

Domestic fuel surcharge increases linked to oil price rises are estimated to partially offset the cost increase

In 2005, the NDRC reinstated the domestic airline fuel surcharge mechanism to alleviate airline cost pressures; in 2009, it clarified the linkage to jet fuel prices, with airlines required to absorb at least 20% of the oil price increase. The surcharge rate was slightly reduced later, and in 2015, the baseline oil price was raised to 5,000 yuan/ton. Following the increase in domestic jet fuel ex-factory prices at the end of March, airlines raised the domestic route fuel surcharge for flights over/under 800 km from April 5 to 60/120 yuan, respectively. In March and April 2025, the surcharge was 10/20 yuan. It is estimated that domestic fuel surcharges will partially cover the oil price increases, with differences in network structure, cabin layout, and passenger load factors leading to varying coverage ratios among airlines.

Airlines will adopt multi-dimensional strategies to cope with oil price pressures, with actual impacts likely smaller than feared

For domestic routes, adding fuel surcharges, considering ticket prices are already market-driven, the actual transmission depends on supply and demand. Over the past two years, low prices stimulated high-volume, price-sensitive passenger flows, and rising ticket prices including fuel surcharges may reduce some passenger numbers. In 2026, with intensified internal competition, airlines are expected to rationally and dynamically adjust passenger load targets. Industry-wide oil price pressures will further promote active revenue management strategies. Continued favorable supply and demand will support effective cost transmission. Seasonal and network source variations may cause differences in oil price transmission, but overall impact is likely less than feared. For international routes, Middle East conflicts significantly affect the operation of Dubai, Doha, and Abu Dhabi hubs. The China-Europe routes benefit from increased domestic transfer traffic and new international transfer passengers, leading to a sharp rise in fares that will surpass expectations and offset oil price increases.

Proactive route adjustments. Flight revenue covering variable costs, i.e., positive marginal contribution, is fundamental to flight operations. Rising oil prices will substantially increase variable costs, prompting airlines to cut low-yield, high-cost routes based on positive contribution margins. Some airlines may seize strategic opportunities to actively expand high-yield routes such as China-Europe.

Efforts to reduce fuel consumption. In recent years, airlines have continuously introduced new fuel-efficient aircraft. Under high oil prices, they are expected to further improve daily utilization of fuel-saving models and optimize schedules for older aircraft.

Geopolitical oil price countercyclical timing and strategic layout of the super cycle

China’s airline supply has entered a low-growth phase, with demand expected to benefit from increased consumption. Continued favorable supply and demand dynamics will keep oil price impacts below concerns, and the “14th Five-Year Plan” will drive profit growth. The NDRC’s regulation of jet fuel prices, combined with unchanged geopolitical oil prices, maintains the long-term logic of the aviation super cycle. It is advisable to seize this rare countercyclical opportunity and prioritize high-quality route networks.

Risk warnings

Geopolitical oil prices, economic fluctuations, policies, equity issuance dilution, safety incidents, etc.