Airline stocks are leading the market higher in Hong Kong. At the time of writing, AIR CHINA (00753) shares are up 10.14% to HK$4.89. CHINA EAST AIR (00670) shares have risen 8.19% to HK$3.70. CHINA SOUTH AIR (01055) shares have gained 7.48% to HK$3.88. CATHAY PAC AIR (00293) shares are up 2.61%, trading at HK$12.17.

The catalyst for the rally is a significant drop in international oil prices on Monday. This followed confirmation that the United States and Iran have reached an agreement, with expectations that the Strait of Hormuz will reopen soon.

The International Air Transport Association has previously projected that global airline fuel expenditure will rise to approximately $350 billion in 2026, up from $252 billion in 2025, with fuel costs accounting for nearly one-third of airline operating expenses.

Analyst Perspective on Fuel Costs

In a recent research note, analysts at China Merchants Securities commented on the situation. They noted that while passenger traffic has seen a significant decline due to cost pressures, considering the changes in international jet fuel prices and the existing cost-pass-through mechanisms, short-term aviation fuel costs may have already peaked from a marginal change perspective.

Cautious Outlook on Oil Prices

The analysts added that although recent expectations of easing US-Iran tensions have risen, it is still necessary to remain vigilant. The potential for short-term oil price volatility due to geopolitical factors and the possibility of mid-term prices remaining at elevated absolute levels could continue to erode airline profits.

Key Factors to Monitor

The report concluded by advising investors to monitor developments in the Middle East situation and changes in oil prices, as these will impact both industry operations and market sentiment towards the sector.