China’s major airlines are experiencing more severe financial turbulence from the Iran war than global rivals, primarily due to unhedged jet fuel costs and fierce competition from the nation’s high-speed rail network. While other airlines can pass on rising expenses, Chinese carriers struggle to do so with price-sensitive passengers, leading HSBC to project a combined $3.2 billion loss for the “Big Three” in 2026. This vulnerability is exacerbated by their minimal fuel hedging, though government backing offers a safety net against bankruptcy.
China's major airline stocks have faced significantly steeper declines than their global counterparts since the onset of the Iran war, grappling with a complex web of economic pressures.
Despite a brief return to profitability in early 2026, Chinese carriers are caught between skyrocketing jet fuel costs and a highly price-sensitive domestic market increasingly challenged by the nation's expansive high-speed rail network. Jet fuel prices experienced a dramatic surge following U.S. and Israeli attacks on Iran in February.
Unlike many international rivals who strategically hedge against fuel price volatility, Chinese airlines maintain minimal hedging positions. This leaves them acutely exposed to the sustained escalation in oil prices, amplifying the financial blow.
The "Big Three" — Air China, China Eastern, and China Southern Airlines — dominate domestic capacity. HSBC analysts forecast these three airlines to collectively incur a net loss of 22 billion yuan ($3.2 billion) in 2026, reversing their earlier quarterly gains and plunging back into the red.
ZHENGZHOU, CHINA - MAY 16: China Southern Airlines aircraft are seen parked at Zhengzhou Xinzheng International Airport on May 16, 2026, in Zhengzhou, Henan Province, China. Cheng Xin | Getty Images News | Getty Images
Their share prices have plummeted by approximately 30% since the conflict began, positioning them among the region's poorest performers, according to LSEG data. In comparison, Singapore Airlines saw a 9% dip, Korean Air Lines dropped 7%, Japan Airlines was down 20%, and ANA Holdings fell 18% over the same period.
These escalating costs have led to a wave of flight cancellations both internationally and domestically. Numerous carriers have scaled back or halted international flight services since the war erupted. Goldman Sachs reports that for the week ending May 14, domestic passenger flights in China decreased by 12.7% year-on-year, with cancellation rates soaring to nearly 30% – figures far exceeding typical seasonal patterns.
The global increase in jet fuel prices, triggered by the Iran war, hit the Asia-Pacific region hardest. Platts, the Singapore benchmark for jet fuel, surged from $93 per barrel in late February to an unprecedented $242 per barrel by late March. While prices have since moderated to $163 per barrel, this level remains painfully high for the notoriously low-margin aviation sector.
Although the Chinese government regulates jet fuel rates, they remain tied to international crude oil prices. HSBC reported a 74% surge in China's ex-factory jet fuel rates in April.
Prices Surge, Cancellations Soar
In an effort to mitigate costs, many airlines are passing on expenses to passengers through higher airfares, fuel surcharges, and increased baggage fees.
Effective April 5, Chinese airlines raised domestic fuel surcharges to 60 yuan for flights under 800 kilometers and 120 yuan for longer routes, a substantial increase from the previous 10 yuan and 20 yuan. A further hike on May 16 pushed short-haul surcharges to 90 yuan and long-haul to 170 yuan, marking additional 50% and 42% rises respectively, on top of the sixfold April adjustment.
However, analysts caution that these adjustments will not fully absorb the impact of soaring fuel costs.
"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," stated Jason Sum, an analyst at DBS Group Research.
Chinese carriers are legally permitted to pass through up to 80% of fuel price increases. Yet, HSBC estimates that the Big Three are only likely to recover about 60% of these costs.
"In practice, they often choose not to use the full allowance because doing so could materially weaken demand," explained Parash Jain, HSBC's global head of transport and logistics research.
HSBC projects that every 10% increase in jet fuel prices would exacerbate the Big Three's combined losses in 2026 by 38%, further widening the gap between them and global peers benefiting from robust pricing power and hedging strategies.
Compelling Railway Alternative
China's rapidly expanding high-speed rail network poses a significant challenge to domestic carriers, offering a compelling, often cheaper, alternative on numerous key routes. Analysts warn that aggressive fuel surcharges by airlines risk destroying demand, a constraint China faces more acutely than most other nations.
Passengers wait to board a train at Tengzhou East Railway Station in Tengzhou, east China's Shandong Province, May 5, 2026. Li Zhijun | Xinhua News Agency | Getty Images
In contrast, Southeast Asian markets like Indonesia and the Philippines, despite having cost-conscious travelers, possess minimal rail alternatives. While Indonesia has implemented a cap on jet fuel surcharges and temporary subsidies to soften the blow, its airlines still maintain greater pricing power.
Countries like Japan and those in Europe boast extensive rail networks but maintain stronger airline pricing power due to robust consumer spending and favorable route economics.
India, facing similar demand sensitivity, has witnessed a booming airline sector largely because high-speed rail options are almost non-existent.
However, Indian Railways Minister Ashwini Vaishnaw recently cautioned at a summit that future corridors such as Mumbai-Pune, Hyderabad-Bengaluru, and Bengaluru-Chennai would become "99% dominated by railways."
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Hedging Gap
A critical vulnerability for Chinese carriers is their lack of fuel hedges, leaving them fully exposed to the unpredictable swings in oil prices.
In 2025, China Eastern was the sole Big Three state-owned carrier to engage in jet fuel price risk management through hedging, and even that position was limited, according to DBS's Sum. Both Air China and China Southern entered the fuel crisis with virtually no hedging in place.
This absence of hedging puts Chinese carriers at a significant disadvantage compared to their better-hedged international counterparts. For instance, Singapore Airlines recorded a S$218 million ($170 million) gain from fuel hedging in the second half of its financial year, which ended March 31.
Willie Walsh, head of the International Air Transport Association, noted in April that while hedging doesn't alleviate jet fuel shortages (which disproportionately affect Asian carriers), Chinese airlines are less impacted by these specific shortages due to the nation's substantial oil reserves and its role as a jet fuel refiner and exporter.
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Who is Suffering the Most?
When assessing which Asian airlines are suffering the most, it's a close call 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."
Nevertheless, Chinese carriers possess a crucial advantage: the implicit 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," Jain concluded.
