High fuel costs are reshaping the financial landscape for Chinese civil aviation, with the industry's three major carriers all reporting losses for the first half of the year. Air China (601111.SH), China Eastern Airlines (600115.SH), and China Southern Airlines (600029.SH) all posted positive revenue growth during this period, yet none managed to turn a profit. Combined, the trio generated over RMB 258 billion in revenue, marking a year-on-year increase of more than 10%. However, their aggregate net losses attributable to shareholders exceeded RMB 8.1 billion, a year-on-year expansion of over 70%.

Despite all three airlines having returned to profitability in the first quarter, the second quarter proved challenging due to rising oil prices driven by geopolitical tensions in the Middle East. These developments created significant headwinds for the aviation industry, sharply compressing profit margins. Air China swung from profit to loss in the second quarter compared to the same period last year, while China Eastern and China Southern both saw their losses widen dramatically.

Year-to-date as of August 31, shares of Air China, China Eastern, and China Southern on the A-share market have declined by more than 37%, 41%, and 37%, respectively.

Navigating the Loss Landscape: China Southern Faces the Steepest Decline

In terms of revenue scale, China Southern maintained its leading position among the three carriers, posting first-half operating revenue of RMB 94.679 billion. Air China followed closely with RMB 89.268 billion, while China Eastern reported RMB 74.234 billion. All three companies achieved near-double-digit revenue growth rates, with China Eastern leading at 11.09%, followed by Air China at 10.54% and China Southern at 9.72%.

The profit picture tells a different story. China Southern recorded a net loss attributable to shareholders of RMB 3.696 billion for the first half of the year, the largest among the three carriers. Its loss expanded by more than 140% year-on-year, making it the biggest decliner in this regard. Air China posted a net loss of RMB 2.286 billion, widening by over 20%, while China Eastern's net loss reached RMB 2.179 billion, an expansion of more than 50%.

Viewed historically, the three major airlines remain trapped in a cycle of "rising revenues without rising profits." Wind data shows that while all three achieved record-high revenues in the first half, they have now suffered first-half losses for seven consecutive years.

The performance of their primary subsidiaries also reveals clear divergence. Within the Air China system, several airline subsidiaries remained in the red, including Shenzhen Airlines with a net loss of RMB 1.049 billion and Shandong Airlines Group with a loss of RMB 409 million. However, Air China's associate company Cathay Pacific posted a net profit of RMB 5.531 billion, contributing RMB 1.197 billion in investment income to Air China, an increase of RMB 23 million year-on-year, providing a crucial boost to its bottom line.

In the China Eastern camp, two subsidiaries achieved profitability: Shanghai Airlines posted a net profit of RMB 38.81 million (down from RMB 103 million last year), while China United Airlines returned to profitability with a net profit of RMB 50.11 million. In contrast, subsidiaries such as China Eastern Jiangsu, China Eastern Wuhan, and China Eastern Yunnan continued to incur losses.

For China Southern, Xiamen Airlines stood out as one of the few profitable passenger subsidiaries, generating a net profit of RMB 36 million in the first half, albeit down from RMB 431 million a year earlier. Other subsidiaries and its associated company Sichuan Airlines remained loss-making. Notably, China Southern Logistics delivered a net profit of RMB 1.906 billion, providing a substantial supplement to the group's overall earnings.

Productivity Gains Offset by Surging Fuel Costs

In terms of output efficiency, all three carriers showed improvement. China Southern's revenue per passenger-kilometer rose 6.52% year-on-year to RMB 0.49, while China Eastern's figure increased 5.74% to RMB 0.516. Excluding fuel surcharges, China Eastern's revenue per seat-kilometer still improved by 4.24%, with first and business class passenger numbers growing 6.2% and related revenue jumping 18.8%. Air China's revenue per passenger-kilometer increased 2.74% to RMB 0.5247.

These metrics indicate that airlines are actively optimizing cabin configurations, increasing the share of high-value passengers, and strengthening revenue management to maximize output per seat. However, the challenge lies in the fact that improvements on the revenue side have yet to offset the dramatic cost increases.

Jet fuel costs are approaching RMB 100 billion combined. While demand continues to recover, fuel prices emerged as the most significant pressure point on the airlines' income statements during the first half. Jet fuel represents one of the largest operational costs for carriers, and its price volatility has a profound impact on profitability.

According to calculations, the three airlines' combined fuel costs exceeded RMB 96.8 billion in the first half. Air China's aviation fuel costs reached RMB 32.766 billion, up more than 34% year-on-year; China Eastern's fuel costs totaled RMB 29.165 billion, rising over 36%; and China Southern's fuel expenses hit RMB 34.886 billion, an increase of more than 37%. Fuel costs alone accounted for approximately 37.5% of the three companies' combined revenue during the period.

More concerning is the rapid rise in fuel's share of total costs. For Air China, fuel climbed to 36.86% of total costs, up 5.81 percentage points year-on-year. China Eastern saw fuel reach 39.3%, an increase of 6.11 percentage points, while China Southern's fuel ratio rose to 37.77%, up 5.57 percentage points.

The surge in fuel costs stems primarily from higher oil prices. China Eastern noted in its report that average jet fuel prices rose 36.8% year-on-year, adding RMB 7.846 billion in fuel expenses, while fuel volume actually decreased 0.43%, reducing costs by only RMB 92 million.

In response, all three carriers are seeking savings through fuel efficiency and lean operations. Air China is controlling consumption through fleet renewal, route optimization, single-engine taxiing, and weight reduction, while also optimizing capacity deployment and marketing to enhance load factors and unit revenue, along with prudent fuel hedging strategies. China Eastern disclosed that it conducted jet fuel hedging transactions during the first half after careful evaluation of derivative market conditions. By the end of June, its unsettled hedging positions stood at zero barrels, with all contracts fully settled.

China Southern is prioritizing hub connectivity and high-yield international routes in its network management while flexibly adjusting domestic capacity based on market demand. The company is optimizing low-load-factor, low-yield routes to improve resource efficiency. "Despite short-term external shocks from oil prices, the industry's fundamental improvement trend remains unchanged," the company stated. "We will continue to respond proactively with multiple measures to increase revenue and efficiency, minimizing the adverse impact of rising oil prices."

At the industry level, the China Air Transport Association has noted that ongoing Middle East geopolitical conflicts have disrupted fuel supply and international trade, keeping international jet fuel prices elevated with significant volatility and pushing up industry cost pressures. Looking ahead to the third quarter, summer travel demand and holiday effects are expected to boost passenger traffic, while reduced fuel surcharges may further stimulate travel demand. However, high fuel prices combined with increased summer flight volumes suggest that the risk of "increased volume and revenue without corresponding profit growth" persists. The key to aviation industry profitability recovery lies in rebalancing fuel prices, ticket prices, and supply-demand dynamics.

Shifting Competition from Price to Experience

Another notable trend among the three carriers in the first half is their accelerated push into in-flight connectivity. Satellite Wi-Fi is evolving from a value-added service into a core component of airline service quality competition. With ticket price pressure and intense domestic market competition, airlines can no longer rely solely on fare cuts to drive growth. Instead, they are focusing on enhancing passenger experience and ancillary revenue through premium cabins, meal services, entertainment, and in-flight internet products.

China Eastern is currently at the forefront. The company disclosed that all its wide-body aircraft now offer free in-flight Wi-Fi on domestic routes, with its connected fleet size, flight numbers, and user base ranking first in China and leading in Asia. The airline is accelerating the implementation of its fleet-wide connectivity program.

Air China and China Southern shared updates during their half-year results presentations on August 31. Air China has retrofitted eight aircraft and put them into operation, with plans to have nearly 50 aircraft offering in-flight internet services by the end of the year. China Southern currently has 41 aircraft providing in-flight connectivity and has preliminarily planned for 70% of its fleet (excluding independently operated subsidiaries) to have connectivity capabilities during the "15th Five-Year Plan" period, with 100% coverage for wide-body aircraft and 60% for narrow-body aircraft.

Strategic Outlook: International Expansion and Revenue Optimization

For the second half of the year, the three airlines are focused on international market expansion, revenue management enhancement, and cost control. On the international front, Air China management stated that the proportion of non-mainland passengers on international routes has continued to rise this year. The airline plans to increase capacity on European routes, expand North American frequencies, and optimize Southeast Asian and Japan-Korea routes based on market conditions.

China Southern management indicated plans to allocate more capacity to Australia-New Zealand, Southeast Asia, and Central-West Asia markets, while improving transfer service experiences to attract more international travelers.

Regarding summer travel performance and Mid-Autumn Festival/National Day outlook, Air China management noted that international routes outperformed domestic ones during the summer but overall fell short of expectations. Advanced bookings for the upcoming holidays are satisfactory, and the company will strengthen revenue control and customer marketing efforts.

China Southern reported that during the summer season, its capacity grew 3.2% year-on-year, passenger traffic increased 4.9%, and load factor improved 1.8 percentage points. However, ticket prices declined 6.1%, consistent with the broader industry trend. While domestic passenger recovery improved with healthy seasonal load factors during the peak period, high fuel prices continue to pressure profitability. International routes showed stronger demand recovery compared to domestic routes.

Current advanced bookings for the Mid-Autumn Festival and National Day holidays are strong, though peak and off-peak fare differentials remain pronounced. On the revenue front, China Southern management said the company will enhance revenue management in the second half, strengthening scientific, systematic, and intelligent decision-making support while coordinating with the industry to address irrational competition.

China Eastern said it will intensify channel and revenue management in the second half, continuing to increase direct sales and reduce agency dependence, expand overseas sales channels, promote inter-airline ticket sales, and boost premium cabin and transfer revenue. Additionally, the company will explore new ancillary revenue streams through products such as pets in the cabin, unaccompanied minor services, and on-board IP collaborations.