HSBC Research cut its ratings on China’s three largest airlines to “Reduce,” forecasting a return to losses in the second quarter of 2026 after air traffic fell 5.7 percent during the May Day holiday.
"The broker rated Air China, China Eastern Air, and China South Air as Reduce, as they face multiple structural headwinds, including increased price sensitivity among Chinese customers, weak pricing power, rising fuel costs without hedging, and limited ability to pass through higher ticket prices," HSBC Research said in a report.
The downgrade follows a shift in travel patterns during China’s May Day holiday, where average daily air passenger traffic fell 5.7% from the prior year, while rail passenger traffic rose 4.6%. The move came as high fuel surcharges contributed to a 9.7% year-over-year increase in average airfares.
HSBC estimates that for every 10% increase in fuel prices, the full-year combined losses for the three state-owned carriers could widen by an average of 38 percent, dragging down their return on equity by 7.8 percentage points.
In contrast to its bearish view on the major carriers, the bank maintained “Buy” ratings on asset-light online travel agencies. HSBC assigned Trip.com Group Limited a “Buy” rating, noting its benefits from growth in long-haul and cross-border travel. It also gave Tongcheng Travel a “Buy” rating, citing its solid growth prospects in lower-tier domestic markets and margin recovery, with both firms shielded from the direct impact of rising fuel costs.
The negative outlook for the airlines stems from a combination of factors beyond fuel costs. HSBC pointed to increased price sensitivity among Chinese consumers and the airlines' limited ability to pass on higher costs through ticket prices as significant structural challenges. This environment has weakened their pricing power relative to the more affordable high-speed rail network.
The rating cuts signal that the recovery for China's major airlines from the pandemic-era downturn remains uneven. Investors will be closely watching the airlines' second-quarter results, due in August, to see if the forecast losses materialize.
This article is for informational purposes only and does not constitute investment advice.
