JPMorgan: Chinese Airlines — Domestic Fuel Surcharge Hike Weighs on Qingming Air Travel and Near-Term Outlook

JPMorgan highlights that China sharply increased its domestic fuel surcharges six-fold effective April 5, 2026. Surcharge rates rose from 10 yuan to 60 yuan for routes under 800 kilometers, and from 20 yuan to 120 yuan for longer routes, marking the largest single adjustment in recent years. This hike was triggered by Middle East tensions pushing Singapore jet kerosene spot prices above $200 per barrel. During the Qingming holiday from April 4-6, air passenger volumes fell 1.3% year-over-year, notably underperforming the 6% average growth across all transportation modes and the 8% growth in rail traffic, indicating clear demand substitution.

Airlines adopted a strategy of raising surcharges while lowering base fares. Key routes, including Shenzhen to Shanghai and Chengdu, saw base fares reduced by 15-25%, leading to a decline in actual revenue per ticket. JPMorgan views the combination of under-recovered fuel inflation and weak demand as a dual negative factor likely to persist through the Labor Day holiday. With fuel accounting for 30-35% of operating costs and the surcharge mechanism historically recovering only 70-80% of cost increases, unhedged fuel inflation could severely damage profitability. JPMorgan expects the industry to record deeper losses in fiscal year 2026 and maintains Underweight ratings on both China Eastern Airlines A/H shares and China Southern Airlines A/H shares.