Guotai Haitong: High oil prices lead to higher prices in the off-season and lower quantities, but aviation demand continues to grow.

Guotai Haitong released a research report stating that in the second quarter of 2026, high oil prices continue to dominate the off-season trend of rising prices and decreasing volumes. Key points to note: 1) Aviation demand (quantity * price) is still growing; 2) Significant increase in European ticket prices will help some airlines achieve significantly better transmission of oil prices compared to the industry; 3) Pressure on oil prices before the peak season is expected to start improving. Geopolitical oil prices do not change the long logic of aviation, focusing on rare opportunities for a counter-trend. Key points of Guotai Haitong are as follows: High oil prices lead to a decrease in off-season prices, focusing on aviation demand (quantity * price) still growing International oil prices have been transmitted to the domestic market since April 2026, with a significant increase in domestic fuel surcharges, and market pricing guarantees sufficient room for base ticket price increases, with supply and demand determining the actual transmission capability. Chinese airlines saw a significant increase in profit year-on-year in the first quarter of 2026, reflecting a recovery in supply and demand, with lower oil prices and higher ticket prices. However, in the second quarter, which is traditionally an off-season, high oil prices can only be partially transmitted, and airlines find it difficult to stimulate passenger traffic with lower prices. The trend of rising ticket prices and decreased passenger traffic in the domestic market continues, consistent with our forward-looking analysis. After the May Day holiday, the market entered the traditional off-season, with another increase in fuel surcharges, and domestic base ticket prices continued to rise year-on-year. It is estimated that the domestic fare including fuel will rise by 20% year-on-year; high ticket prices lead to a reduction in price-sensitive customers, with an estimated year-on-year decrease in domestic passenger traffic of nearly 10%. It is emphasized that aviation demand is the consumer spending on civil aviation (quantity * price), and although the high oil prices in April and May have led to a reduction in passenger flows, aviation demand still shows a clear year-on-year growth trend. With the end of the college entrance examination in June and the start of the summer travel season, it is expected that supply and demand will improve the transmission capacity of oil prices, potentially exceeding market expectations. The ticket price increase on the China-Europe route is expanding, which is expected to help China's airlines achieve significantly better transmission of oil prices compared to the industry The ongoing Middle Eastern conflict affects the operation of major international hubs in Asia and Europe such as Dubai, Doha, and Abu Dhabi. The China-Europe route benefits from the return of domestic transfers and the addition of international transfers, resulting in a significant increase in ticket prices since March 2026, continuing in April and May. Due to the longer booking period for international flights, as tickets booked before March are used, it is expected that ticket price increases on the China-Europe route for airlines will gradually widen significantly. Air China is the largest carrier on the China-Europe route, with a higher proportion of revenue from European routes for Eastern Airlines and Lucky Airlines, which will benefit significantly from the sharp increase in ticket prices on the China-Europe route, significantly improving the transmission capacity of oil prices compared to the industry. It is expected that Air China and others will seize the opportunity to increase investments in the Europe route, not only expanding revenue from the Europe route, but also improving the rotation of wide-body aircraft fleets to reduce unit costs, as well as ensuring a reduction in domestic core trunk supply and a recovery in supply and demand, and even driving significant increases in flight prices on related routes beyond expectations. The pressure on airline oil prices in May may have peaked, with domestic aviation fuel prices expected to start decreasing from June According to the pricing mechanism for domestic aviation fuel, prices are linked to the average Singapore aviation fuel price from the previous month, calculated by the NDRC at the beginning of each month according to a formula. Therefore, with the international oil price transmitted to the domestic aviation market since April 2026, the NDRC has continuously controlled the price rise, but the increase in domestic aviation fuel prices in May is still as high as 111% year-on-year, significantly higher than the 78% increase in international crude oil prices in April. The reason behind this is that the price gap between Singapore aviation fuel and Brent crude has long been maintained at 10-20 dollars per barrel, but in March and April, due to the impact of the Middle Eastern conflict, the crack price surged to 80-90 dollars per barrel. Since May, the continued disruption of traffic in the Strait of Hormuz continues to affect global crude oil supply, with Brent crude prices remaining above 100 dollars per barrel, but the crack price of Singapore aviation fuel has fallen below 50 dollars per barrel. According to our estimates, the domestic aviation fuel ex-factory price in June will fall as the Singapore aviation fuel price in May falls, and it is expected that the pressure on airline oil prices will begin to ease before the peak season. High oil prices and the low off-season provide a counter-trend opportunity, increase holdings in aviation In the "14th Five-Year Plan," ticket prices were marketized and fleet growth slowed down; in the "15th Five-Year Plan," airspace constraints continue to be strictly controlled at all times, and the continued improvement in the supply and demand and deepening of the anti-overcorrection will ensure that the short-term impact of oil prices is less of a concern, driving significant and sustainable profit growth in the coming years. Geopolitical oil prices do not change the long-term logic of the aviation "super cycle," as high oil prices and low off-seasons provide a counter-trend opportunity, with high-quality airline networks and a high proportion of European routes being preferred. Risk warning: Geopolitical oil prices, economy, industry policies, dilution through issuance, safety accidents, etc.