By Kimberley Kao

China's three largest airlines returned to profit in the first quarter, but the recovery may prove short-lived as higher fuel costs due to the Middle East war cloud the outlook and threaten bottom lines.

The Chinese aviation sector delivered a strong start to 2026 even as the outbreak of the Iran war in late February disrupted air travel and heightened macroeconomic uncertainty.

Yet the strong outturn wasn't enough to assuage investors' worries. Hong Kong-listed shares of China Southern Airlines, Air China and China Eastern Airlines ended 2.5%, 1.5% and 1.8% lower, respectively, on Thursday after the results.

China Southern late Wednesday said it swung to net profit of 1.48 billion yuan, equivalent to $216.4 million, from net loss of 747 million yuan a year earlier, attributing the performance to a "sustained improvement in production and operations."

China's two other major state-owned carriers reported similarly positive results. Flag carrier Air China posted net profit of 1.71 billion yuan, compared with net loss of 2.04 billion yuan a year earlier. Route optimization, increased operating income and cost-control measures helped it achieve profitability, it said.

China Eastern recorded net profit of 1.63 billion yuan, reversing the 995 million yuan loss in the previous year.

DBS Group Research said March operating data across the three airlines were stronger than expected, with traffic growth outpacing capacity, and international routes being the standout. Temporary tailwinds, such as lower jet-fuel prices, buoyed airlines' performance in the first quarter, it noted.

"We see a risk that the big three could revert to loss-making" in the second quarter, which is when the cost surge in March will show up, DBS said in a note. "The full impact of higher jet fuel prices has yet to flow through, and we expect margins to come under pressure in subsequent quarters."

Chinese carriers will "struggle to pass on costs without losing customers," HSBC said in a recent note, given that travelers in China are more price-sensitive.

In a sign of confidence in travel demand and the aviation industry's long-term recovery, China Southern separately announced Wednesday that it and its subsidiary, Xiamen Airlines, plan to buy 102 and 35 Airbus A320neo narrow-body aircraft worth over $21 billion, with deliveries scheduled in stages from 2028 to 2032.

The deal, which includes negotiated price concessions from Airbus, is intended to "enhance the group's market competitiveness by increasing its flight capacity," it said.

The state-owned carrier plans to raise 15 billion yuan by issuing up to 5.44 billion new A shares to finance aircraft purchases and supplement general working capital.

Write to Kimberley Kao at kimberley.kao@wsj.com

(END) Dow Jones Newswires

April 30, 2026 06:27 ET (10:27 GMT)

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