CMSC: Short-term performance impacted by oil price shocks, supply and demand are accumulating strength, low-cost airlines are expected to lead the recovery.

The CMSC released a research report, stating that short-term oil prices and Middle East geopolitical tensions are the most core factors affecting industry operations and profitability. Short-term cost pressures may have peaked, and attention should be paid to the progress of US-Iran negotiations and changes in oil prices. Considering international aviation fuel price fluctuations and existing transmission mechanisms, marginal changes in dimensions, short-term aviation fuel costs may have reached their peak; recent progress in US-Iran negotiations has eased tensions, with expectations of the reopening of the Strait of Hormuz, but caution should still be exercised against fluctuations in oil prices due to geopolitical tensions, short-term volatility intensifying, and mid-term high levels maintaining profit erosion. It is recommended to continue monitoring the progress of US-Iran negotiations, changes in oil prices affecting industry operations, and the sector's sentiment. If geopolitical tensions improve in the future, oil prices for 2027-28 are expected to see a significant year-on-year decline, with demand release coupled with slow supply growth, industry profitability elasticity expected to be released. The main points of view from CMSC are as follows: Industry review in the first half of 2026 The industry experienced a profit recovery to test oil price pressures, with strong supply and demand in Q1, significant improvement in profitability; Fuel costs surged in Q2, severely impacting the industry, but revenue is expected to continue growing, with demand resilience remaining strong. 1) Demand growth in the first four months increased by 8.1%, with demand growth slowing in Q2 due to high oil prices. In the first quarter of 2026, national civil aviation passenger turnover increased by +9.6% year-on-year, with April civil aviation passenger turnover increasing by +3.7% year-on-year. 2) Industry utilization rate reached a new high in Q1, with supply increasing rapidly; Supply growth plummeted in Q2 due to oil price shocks. From January to April 2026, industry ASK increased by +5.5% year-on-year, compared to +23.3% in the same period of 2019. In Q1, benefiting from the year-on-year increase in aircraft numbers and utilization rates, industry ASK increased by 6.8% year-on-year (compared to 6% for the full year of 2025), and in April, due to oil price shocks, industry ASK growth rate dropped to 1.7%. 3) Benefiting from overall improvement in supply and demand in Q1, and a significant increase in international routes' load factor since March, overall load factor remained at a high level. In January-April 2026, the average load factor for national civil aviation was 86%, a 2-percentage-point increase year-on-year, compared to a 2-percentage-point increase in the same period of 2019. The load factor for the industry was 86% in the first quarter, a 2.2% increase year-on-year, and in April, the industry load factor was 86.1%, a 1.6% increase year-on-year. 4) Fuel surcharges have led to a significant increase in overall ticket prices since Q2. Benefit from longer flight distances and stable passenger kilometer yield levels, domestic ticket prices in Q1 of 2026 increased year-on-year. It is expected that from April to May, fuel surcharges will cause an increase in domestic ticket prices, with bare ticket prices slightly increasing year-on-year, overall industry revenue and demand resilience evident. Outlook for the future Under high oil prices, short-term supply and demand pressures are significant, with supply and demand gradually recovering in 2027-28. 1) Supply side: In 2026-28, major airlines' fleet plans will see a slight increase, with delivery capacity gradually recovering, but actual aircraft deliveries still face pressure compared to introduction plans, with expected gradual supply recovery. 2) Demand side: Considering the impact of oil prices in 2026, rising travel costs, and a slowdown in domestic demand growth, demand is expected to rebound significantly in 2027, with oil prices falling and demand releasing, coupled with a low base, leading to a significant increase in demand growth in 2028, returning to stable growth, with a expected compound growth rate of about 4% over 3 years. Considering the slowdown in demand in 2026 due to oil price impact, the increase in demand in 2027, the expected compound growth rate is around 12% over 3 years. Considering both domestic and international demand assumptions, industry demand is expected to compound grow by about 6% from 2026 to 2028. Taking into account both supply and demand, the industry in 2026 is significantly affected by oil prices. There is hope for a recovery from the impact of oil prices in 2027-28 and a restoration of supply and demand. At the airline level, in the face of high oil prices, cost-leading airlines are more resilient and may lead industry recovery. Taking Spring Airlines as an example, 1) In terms of cost composition, even without considering differences in route structure, benefiting from cost management advantages, Spring Airlines' unit fuel costs are significantly lower than full-service airlines, with the increase in fuel costs per kilometer lower than that of full-service airlines during the rise in oil prices; if the same level of cost compensation is considered, the price difference between Spring Airlines and full-service airlines widens, enhancing the company's price advantage and exacerbating the difficulty in price transmission for full-service airlines. 2) In terms of actual operations, due to the weak fuel cost transmission ability on certain routes or a sudden decrease in price advantage after transmission, Spring Airlines has substantially reduced competition and increased market share, especially full-service airlines have significantly reduced flights. 3) In terms of profitability, low-cost airlines like Spring Airlines have higher profitability levels and profit margins. Under the impact of rising oil prices, with a partial transmission of fuel costs, they can still achieve high profitability. Risk warning: Macro-economic growth lower than expected, international route recovery slower than expected, supply growth exceeding expectations, significant oil price increases, and substantial depreciation of the RMB, among others.