Zhongtai: Aviation sector repair starts, grasp the industry's dual main lines.

Zhongtai released a research report stating that the aviation sector is currently in a high-risk zone and should focus on repairing the two main lines. The firm believes that the stock price of aviation companies may go through three stages of "expectation, operation, performance". 1) Expectation repair: Geopolitical tensions easing, oil prices falling, improvement in cost deterioration expectations, leading to a rebound in stock prices. 2) Operation repair: Oil prices decreasing significantly, easing cost pressures leading to improved capacity utilization. 3) Performance repair: Profitability increasing, market shifting focus from supply and demand improvements to performance resilience. Key points from Zhongtai: 2026 H1 review: High oil prices impact stock prices and fundamentals simultaneously Sector performance: Since the beginning of 2026, the aviation sector has experienced a significant decline. In the first half of the year, due to the situation in the Middle East, international oil prices rose sharply, leading to a deep correction in the aviation sector, with China Express Airlines (-36.74%), China Eastern Airlines Corporation (-36.50%), and Air China (-35.43%) leading the decline. Fundamental performance: Tightening capacity due to high oil prices, leading to a slowdown in demand growth. From January to May 2026, the industry's ASK/RPK cumulative growth rate was +3.51%/5.79%, with ASK/RPK growth rates in May declining year-on-year (-4.58%/-3.45%). 2026 H2 outlook: Cost pressures easing, aviation repair begins On the cost side, international oil prices are decreasing, relieving cost pressures for airlines. Since the US-Iran conflict in March, international oil prices have soared, putting added pressure on airlines' costs, but with the easing of tensions in mid-June, oil prices have gradually fallen. 1) Decreasing oil prices and fuel surcharges relieve cost pressures on airlines, reducing travel costs for passengers. In July, the ex-factory price of aviation kerosene was 8030 yuan, down 17.54% month-on-month and up 46.08% year-on-year, with fuel surcharges of 50/100 yuan per person (30/50 yuan per person lower than before adjustment, compared to 10/20 yuan per person in the same period last year). 2) According to sensitivity tests, when Singapore aviation kerosene prices are near $95, domestic airlines only need a 1.5% increase in full ticket prices to cover the cost increase in domestic oil prices. Mainline 1: Low-cost airlines strengthen cost barriers, Spring Airlines grows against high oil prices 1) High load factor, long-haul flights, and low unit fuel costs make the company have lower cost pressures than its industry peers under the same oil price impact. In 2025, Spring Airlines' domestic average flight distance was 1724 kilometers, with an average load factor of 91.53%, and a unit ASK fuel cost of 0.10 yuan (74% lower than the average of the three major airlines). Long-haul flights dilute the company's unit ASK fuel costs, and the high load factor enables the company to cover rising fuel costs with fuel surcharges more effectively than other airlines. 2) Contrary to the trend, capacity is growing: From January to May 2026, the company's cumulative ASK/RPK increased by +15.27%/18.51% year-on-year, making it the only listed airline with double-digit growth in supply and demand during this period. The company expects its fleet to grow at a rate of 9%-10% from 2026 to 2028, significantly higher than the industry average. 3) Profit realization: Since 2023, the company's profitability has been significantly higher than its industry peers, hitting historical highs repetitively. In Q1 of 2026, the company achieved a net profit attributable to the parent of 980 million yuan, up 45.15% year-on-year, the highest Q1 in its history. In 2025, the company's per aircraft profit was 17.29 million yuan, surpassing the level in 2017, and ranking first among listed airlines. 4) Compared with leading overseas low-cost airlines, Spring Airlines' fundamentals and stock price trends show a clear deviation. When compared with Ryanair, Spring Airlines, and Southwest Airlines, they show three trends: strong fundamentals + strong stock price, strong fundamentals + weak stock price, weak fundamentals + strong stock price. The firm believes that Spring Airlines has repeatedly set new profit highs, and stock price recovery is only waiting for a catalyst. Mainline 2: Full-service airlines show initial benefits of international routes, profit elasticity expected to be unleashed 1) The fundamentals of the three major airlines are improving year by year, with increased investment in international routes being a key driver. 1) Profitability improving year by year: In 2025, China Southern Airlines achieved a net profit attributable to the parent company of 857 million yuan, becoming the first of the three major airlines to return to profitability for the full year after the epidemic. Both Eastern Airlines and Air China had negative net profits due to deferred tax assets adjustments, but Eastern Airlines' total profits had turned positive. Q1 of 2026 was the best Q1 for the three major airlines since the epidemic. 2) Continued increase in investment in international routes leading to marginal contributions. By the end of 2025, the international route capacities of Air China, Eastern Airlines, and China Southern Airlines had recovered to 98%/113%/98% of the levels in the same period of 2019. In Q1 of 2026, the three major airlines continued to increase their investments in international routes, with ASK for international routes increasing by 7.68%/10.77%/16.07% year-on-year. The shift towards international routes not only improves the utilization of wide-body aircraft but also reduces domestic capacity and eases price competition. Amid the backdrop of a significant rise in oil prices in Q2, the reduction in capacity for international routes was smaller than that for domestic routes, demonstrating the rigidity of international demand. 2) Benchmarking against Japanese airlines, Chinese airlines' international routes may be in the early stages of development. 1) Japan provides a complete reference for "profit-driven by international routes". First, domestic routes in Japan are heavily affected by the Shinkansen, and with limited land area in Japan, the development of international routes is inevitable. Secondly, the "tourism-oriented nation" policy combined with the favorable impact of a weak yen has led to a booming inbound tourism sector in Japan. In 2024-2025, the number of inbound tourists to Japan exceeded pre-epidemic levels, and the load factors for Japan Airlines and All Nippon Airways rose to 83%-86%, with international route ticket prices increasing by about 60% compared to 2019, driving net profits to 137.6 billion yen (+28.6%) for Japan Airlines and a record-high net profit of 169.1 billion yen for All Nippon Airways. 2) However, the development of international routes for domestic airlines in China is not a simple replication. While high-speed rail in China diverts traffic from domestic flights under 800-1000 kilometers, the domestic aviation sector is still in the stage of overall growth, with penetration rates far from saturation. Moreover, with China's vast land area, there is still significant room for the development of long-haul domestic routes; current Chinese international routes are driven by outbound instead of inbound travel, but with support from visa-free policies, inbound tourism is just beginning to take off. 3) The differences in stock price performance may partially reflect differing levels of profitability from international routes. Since 2023, Japanese airlines have shown positive returns (All Nippon Airways +18%, Japan Airlines +26%), while the three major Chinese airlines are still bottoming out (Air China +42%, China Southern Airlines +32%, Eastern Airlines +31%). Although during this period stock prices were influenced by multiple factors such as market sentiment, oil prices, demand, etc., the high profitability of Japanese international routes has been realized in earnings, while Chinese airlines are still in the process of recovering their international routes, with volume recovery ahead of price realization, coupled with domestic price competition, improvements in profitability will still require time to validate. Risk warnings: Risks of macroeconomic downturns, exchange rate fluctuations, oil price increases, credibility of third-party data, and research reports using outdated information.