Airlines are struggling but China’s ‘Big Three’ face a tougher year than most

China’s biggest airline stocks have suffered more than others since the war in Iran began, as a combination of factors weighs them down.

The country’s carriers — which swung to a quarterly profit in the beginning of 2026 — are caught in a pincer of higher fuel costs and a price-wary domestic market being eroded by high-speed rail. Jet fuel prices soared after the U.S. and Israel launched attacks on Iran in February.

And while many global peers are hedged against swings in fuel prices, Chinese airlines hedge little of their fuel purchases, making them vulnerable to a harder hit from the prolonged rise in oil prices.

The so-called “Big Three” — Air China, China Eastern and China Southern Airlines — together account for the bulk of domestic capacity and are expected to record a combined net loss of 22 billion yuan ($3.2 billion) in 2026, swinging back into the red after the profitable first quarter, according to HSBC analysts.

Their share priced have fallen around 30% since the war began, among the worst performers in the region, according to LSEG data. Singapore Airlines shares were down 9% as of Thursday over the same period, Korean Air Lines slipped 7%, Japan Airlines down 20%, and ANA Holdings 18%.

The surging costs have triggered a wave of international and domestic flight cancellations. Multiple carriers have reduced or suspended international flight services since the outbreak of the war. And during the week ending May 14, domestic passenger flights in China fell 12.7% year-on-year while cancellation rates hit nearly 30%, both sharply worse than seasonal norms, according to Goldman Sachs.

Jet fuel prices increased worldwide after the Iran war started, most of all in Asia-Pacific. Platts, a widely used jet fuel Singapore benchmark, climbed from $93 per barrel in late February to a record $242 per barrel in late March. Prices have since moderated to $163 per barrel, which is still achingly high for the notoriously thin-margined aviation industry.

The Chinese government helps to regulate jet fuel rates, though prices are still linked to international crude oil rates. The country’s ex-factory jet fuel rates surged 74% in April, according to HSBC.

To cope, many airlines are passing costs along to passengers in the form of higher airfares, fuel surcharges, and higher baggage fees.

Starting April 5, Chinese airlines raised domestic fuel surcharges to 60 yuan for flights under 800 kilometers and 120 yuan for longer routes — up from 10 yuan and 20 yuan previously. A further increase took effect May 16, pushing short-haul surcharges to 90 yuan and long-haul to 170 yuan — a 50% and 42% rise respectively on top of the sixfold April adjustment.

But analysts say this won’t fully absorb the fuel cost shock.

“The fare increases required to fully offset higher fuel expenses are too large to be realistically achieved, particularly in a highly price-sensitive and competitive environment,” said Jason Sum, analyst at DBS Group Research.

Chinese carriers can legally pass through up to 80% of fuel-price increases. Yet, HSBC estimates the Big Three are likely only recouping around 60% of these costs.

“In practice, they often choose not to use the full allowance because doing so could materially weaken demand,” said Parash Jain, HSBC’s global head of transport and logistics research.

The bank estimates that every 10% increase in jet fuel prices would widen the Big Three’s combined losses in 2026 by 38%, “further decoupling the Big 3 from global peers with robust pricing power and hedging strategies.”

China’s expanding high-speed rail network also undercuts domestic carriers on prices across many key routes, with analysts warning that aggressive fuel surcharges risk demand destruction and China faces that constraint more acutely than most peers.

Southeast Asian markets such as Indonesia and the Philippines have cost-conscious travelers but minimal rail alternatives. While Indonesia has a cap on jet fuel surcharges and deployed temporary subsidies to cushion the shock, airlines there still retain greater pricing power.

Japan and Europe have expansive rail networks, but retain stronger airline pricing power due to stronger consumer spending power and route economics.

India, which has similar demand sensitivity, has seen its airline sector boom partly because high-speed options barely exist.

Indian Railways Minister Ashwini Vaishnaw last week warned at a summit that corridors such as Mumbai-Pune, Hyderabad-Bengaluru, and Bengaluru-Chennai would become “99% dominated by railways.”

Chinese carriers also lack fuel hedges, leaving them fully exposed to oil price swings.

China Eastern was the only one of the nation’s Big Three state-owned carriers to manage jet fuel price risk through hedging in 2025. Even that position was thin, according to DBS’s Sum. Air China and China Southern entered the fuel shock with essentially no hedging.

That put Chinese carriers at a disadvantage against better-hedged international peers. Singapore Airlines booked a S$218 million ($170 million) gain from fuel hedging in the second half of its financial year ending March 31.

Hedging doesn’t help with jet fuel shortages, which are hitting Asian carriers the hardest, Willie Walsh, head of the International Air Transport Association, told CNBC in April. Chinese carriers aren’t as affected by the shortage as other Asian airlines, however, owing to vast oil reserves and the country’s status as a jet fuel refiner and exporter.

As to which Asian airlines are suffering the most, it may be a toss-up between Indian and Chinese carriers.

“In the near term, Indian airlines appear more vulnerable given currency weakness and higher exposure to the Middle East region,” said HSBC’s Jain. “However, over the medium term, we think Chinese carriers are worse off. Indian airlines face less direct substitution from rail and can pass through more of the fuel cost.”

Plus, Chinese carriers ultimately have the backing of the Chinese government.

“State-owned entities will remain resilient and can continue to raise equity to support their balance sheets, which makes them less vulnerable to bankruptcy than similarly exposed private global carriers,” said Jain.