By Julie Zhu
HONG KONG, July 17 (Reuters) - China's biggest airlines enter the peak summer travel season facing a more challenging outlook after warning of heavy first-half losses, with weakening demand raising doubts that they can absorb higher fuel costs during the industry's busiest months.
Air China, China Eastern Airlines and China Southern Airlines all warned on Tuesday they expected combined first-half net losses of up to 9 billion yuan ($1.33 billion), a sharp reversal from their combined first-quarter
profit, which had been boosted by strong Lunar New Year demand.
The losses underscore the dilemma facing Chinese airlines: raising fares to recover higher fuel costs risks further weakening demand, while keeping ticket prices low leaves carriers absorbing the additional expense.
Parash Jain, HSBC's global head of transport and logistics research, said a "negative wealth effect" was reshaping Chinese consumer habits as economic growth slowed and every airfare increase risked lowering demand.
"The rising ticket prices are hurting demand and pushing people to use high-speed rail more for shorter distances," Jain said, noting that weather disruptions and a smaller pool of school-age children were also weighing on summer travel demand. "But the single largest reason for weaker demand is the increased ticket prices."
HSBC analysts expect China's three biggest carriers to post combined losses of about 16.8 billion yuan in 2026, compared with the current market expectation for a combined profit of 1.3 billion yuan.
Air China said in a stock exchange filing that elevated fuel prices had "drastically squeezed" airline profit margins.
Unlike many Asian rivals, Chinese airlines hedge little of their fuel purchases, leaving them more exposed to the oil price surge triggered by the Iran conflict. Although jet fuel prices have fallen from their second-quarter peak, they remain about 50% above pre-war levels.
"Given that jet fuel normalization will take time, weak demand conditions are likely to remain the key concern heading into the summer peak season," Bank of America analysts said in a note.
The third quarter is typically the most profitable for Chinese airlines. But aviation data firm Flight Master is projecting traffic carried by Chinese airlines on domestic and international routes will fall 3.6% year-on-year to 142 million passengers in July and August, which would mark the first contraction in the peak season since 2022.
From July 1 to 14, average daily flights declined 2.2% year-on-year, with domestic flights down 1.8% and international flights down 3.6%, according to Flight Master. Economy class fares averaged 831 yuan, down 1.2% year-on-year and 6.1% below 2019 levels.
China's domestic passenger demand contracted 6.2% in May from a year earlier, according to the International Air Transport Association, the weakest performance against major domestic markets globally and the first monthly decline in China not linked to the timing of the Lunar New Year since the pandemic.
The big three airlines, which rely on international routes for about 30% of their revenue, have seen surging demand on European routes since the start of the Iran conflict as travellers shun disrupted Middle Eastern hubs. But those gains are eroding as Gulf carriers restore flights and offer lower fares, according to Flight Master data.
($1 = 6.7794 Chinese yuan renminbi)
(Reporting by Julie Zhu; Editing by Jamie Freed)
