China Merchants Securities has released a research report maintaining a "recommended" investment rating for the aviation industry. The focus remains on the impact of Middle East tensions on oil prices and the ability of airfares to cover rising fuel costs. From a fundamental perspective, demand during the Spring Festival travel period grew rapidly, with civil aviation passenger traffic increasing by 4.6% year-over-year over 40 days. Domestic passenger flow rose by 5.5%, base airfares increased by 3.8%, and the passenger load factor improved by 1.7 percentage points. Recent oil price increases, driven by Middle East tensions, have led to significant adjustments in the sector. An improvement in the geopolitical situation could alleviate some pressures on the aviation industry. However, caution is warranted regarding the potential negative impact of a rapid short-term spike in oil prices on market sentiment, as well as the erosion of profits if mid-term oil prices remain elevated. A substantial rise in the fuel surcharge is anticipated for April, highlighting the importance of monitoring actual airfare performance and the capacity to cover fuel costs. Key viewpoints from China Merchants Securities are as follows: Aviation fuel prices are influenced by both crude oil prices and the crack spread. The crack spread itself is affected by multiple factors including refining capacity, market demand, and geopolitical events. For instance, significant fluctuations in global demand for aviation fuel and diesel around the 2008-09 financial crisis led to volatile crack spreads. The pandemic in 2020 caused a sharp contraction in demand, narrowing the spread noticeably. In 2022, recovering demand, insufficient capacity restoration, and the Russia-Ukraine conflict pushed the crack spread higher. A hypothetical disruption of the Strait of Hormuz in March 2026 could drive the crack spread above $100 per barrel. Domestically, the pricing mechanism for aviation fuel has evolved through three stages, transitioning from administrative control to market linkage. The current ex-factory price for aviation fuel in China is now based on the monthly average price of Singapore jet fuel, adjusted monthly. Under the existing surcharge collection mechanism, the coverage of fuel costs appears high from a static viewpoint. However, the actual formation of airfares during the implementation of fuel surcharges must also consider consumer affordability and real-time market supply and demand. According to the firm's calculations, assuming Brent crude at $80 per barrel and Singapore jet fuel at $110 per barrel, the corresponding average surcharge would be approximately 72 yuan per person. To largely offset the impact of rising oil prices, base airfares would need to increase by about 1%, and full fares by around 8% compared to 2025 levels. If further increases in aviation fuel costs lead to additional surcharge hikes, even greater fare increases would be necessary. Conversely, if market conditions result in higher fuel surcharges but lower base airfares, forcing airlines to absorb part of the increased fuel costs, airline profitability would face additional pressure. Historically, in 2018, benefiting from domestic airfare reforms among other factors, the three major Chinese airlines saw overall improvements in domestic revenue. Excluding the impact of fuel surcharges, domestic route revenue was flat or showed slight growth year-over-year, correlating with a minor improvement in post-foreign exchange adjusted profits that year. In 2022, due to the pandemic, domestic passenger traffic for the three major airlines fell by 40% year-over-year. While domestic revenue per passenger kilometer increased by an average of 8.4%, base airfares still declined year-over-year after excluding the effect of fuel surcharges. High oil prices combined with the pandemic environment led to a further expansion of industry losses that year. Risks include escalation of geopolitical conflicts, macroeconomic downturn, significant depreciation of the renminbi, sharp increases in oil prices, tight crude oil supply, major public health emergencies, and significant natural disasters.