Morgan Stanley has released a research report stating that while energy shocks have led to a deterioration in the fundamentals of Chinese airlines, the related negative factors are likely already reflected in their stock prices. The firm estimates that current ticket price increases are insufficient to cover rising costs, indicating short-term margin pressure, while demand is also being affected by higher fares. Morgan Stanley views fuel prices as the primary variable affecting the industry's outlook over the next 12 to 18 months. Under its base-case scenario, the firm predicts that jet fuel prices will normalize to between $100 and $110 per barrel by the end of 2026, delaying the Chinese aviation sector's upward cycle, which is now expected to resume in 2027. The bank maintains a constructive outlook on the Chinese aviation industry for four main reasons: (1) inbound tourism will continue to support the asset utilization of Chinese airlines; (2) with ample jet fuel supply, China can attract more international transit passengers; (3) capacity supply constraints will persist and may even worsen; (4) most negative factors are already priced in, and jet fuel prices are in a corrective phase. Regarding individual stocks, Morgan Stanley has lowered its target price for Air China Limited (00753) H-shares from HK$10.00 to HK$7.70, a 23% reduction, while maintaining an "Overweight" rating. The firm also cut its target for Air China Limited (601111.SH) A-shares from RMB 11.10 to RMB 8.30 and removed the stock from its top picks list due to uncertainty over fuel price prospects. Morgan Stanley expects Air China to post a loss of RMB 4.7 billion in 2026, with a return to profitability of RMB 4.5 billion projected for 2027. Morgan Stanley also reduced its target price for China Eastern Airlines Corporation Limited (00670) H-shares from HK$8.10 to HK$5.90, a 27.2% cut, while keeping an "Overweight" rating. The target for China Eastern Airlines Corporation Limited (600115.SH) A-shares was similarly lowered from RMB 8.10 to RMB 5.80. The report notes that China Eastern is actively expanding its international capacity, a move that will help solidify Shanghai's position as an international aviation hub. The firm forecasts a loss of RMB 7.0 billion for China Eastern in 2026. Furthermore, Morgan Stanley cut its target price for China Southern Airlines Company Limited (01055) H-shares from HK$8.50 to HK$5.90, a 30.6% reduction, while maintaining an "Overweight" rating. The target for China Southern Airlines Company Limited (600029.SH) A-shares was also lowered from RMB 9.71 to RMB 6.70. Morgan Stanley believes that amid global trade tensions, the upside potential for the air cargo cycle may be limited and expects China Southern to record a loss of RMB 5.9 billion in 2026. Morgan Stanley anticipates that an increase in direct flights between China and the U.S. would have a moderately positive impact on Chinese airlines, as current flight availability is only at 30% of pre-pandemic levels, lagging behind demand recovery. Conversely, if Chinese airlines place orders with Boeing, it would be a slight negative, as the capital expenditure burden could weigh on the valuations of the three major carriers. The firm does not expect any significant adjustments to the capacity expansion plans of Chinese airlines before 2028.