High oil prices "put heavy pressure" on the airline industry, with some airlines' fuel surcharges increasing by over 100%

Source: Daily Economic News Author: Wu Zepeng, Shu Dongni, Yang Yu

At 24:00 on March 23, domestic fuel prices will increase. The rise in gasoline prices is driven by the continuously rising international crude oil prices—since March, the risk of shipping disruptions in the Strait of Hormuz has pushed Brent crude oil prices above $110 per barrel at one point. Jet fuel has also been affected, with the jet fuel crack spread soaring to over $100 per barrel at one point.

For airlines, this is akin to a “stress test” on the cost side. Just a few days before the fuel price hike, Cathay Pacific took the lead: the fuel surcharge for long-haul flights departing from Hong Kong was increased from HKD 569 to HKD 1,164, an increase of over 100%. Hong Kong Airlines, Air India, and Japan Airlines followed suit, and many domestic airlines also made intensive adjustments to international route fuel surcharges.

This is a microcosm of the heavy pressure on international oil prices in 2026. Raising fuel surcharges is the most direct method of passing on costs. However, more than one industry insider told reporters from the Daily Economic News that this mechanism has limited effectiveness in practice—when purchasing tickets, travelers consider ticket prices, fuel surcharges, and other fees comprehensively. Airlines and modes of travel are not the only choices, which constrains the increase in fuel surcharges.

Because of this, strategies employed by airlines (hereinafter referred to as “carriers”) go far beyond just “raising prices,” including hedging 30% of fuel costs by Cathay Pacific, plans by China Eastern Airlines to engage in jet fuel hedging, and United Airlines announcing a 5% capacity reduction and the suspension of inefficient routes.

Reduce capacity, increase ticket prices, raise fuel surcharges.

In response to the sharp rise in fuel costs, some airlines have chosen to cut capacity to control losses.

The CEO of United Airlines previously stated that if fuel costs remain high, airlines would rather give up some demand for business than operate unprofitable routes. Recently, the airline announced a 5% reduction in scheduled flights for the second and third quarters, stating that if oil prices remain high, its annual aviation fuel expenses will increase by $11 billion.

Air New Zealand and Scandinavian Airlines also announced flight reduction plans. In addition, Vietnamese authorities have reminded the country’s aviation industry to prepare for possible flight reductions starting in April due to the heightened risk of fuel supply shortages.

At the same time, airlines around the world are raising fuel surcharges or directly increasing ticket prices.

Starting March 18, Cathay Pacific significantly raised its fuel surcharge; for flights from Hong Kong to North America, Europe, the Middle East, and Africa, the fuel surcharge increased from HKD 569 to HKD 1,164, more than doubling.

Hong Kong Airlines also raised its fuel surcharge, increasing short-haul flights from Hong Kong to Asia to HKD 290; long-haul flights to Europe, Africa, and the Middle East increased to HKD 1,164. Air India announced it would phase in increases in domestic and international route fuel surcharges. Japan Airlines also stated that due to continuous cost increases putting pressure on company profits, it is considering imposing fuel surcharges on domestic flights.

Additionally, Air India has raised long-haul ticket prices by 15% and is considering further increases. Thai Airways plans to raise ticket prices by 10% to 15% to cover skyrocketing fuel costs. Air New Zealand has increased ticket prices for its domestic and international routes and stated that if aviation fuel costs remain high, it may further adjust ticket prices and flight arrangements in the future. Air France-KLM has decided to increase ticket prices for long-haul flights, citing recent price increases by Scandinavian Airlines and Air India as a reference.

Several domestic carriers have also adjusted fuel surcharges for some international routes.

Juneyao Airlines has increased fuel surcharges for routes between China and Finland, between China and Southeast Asian countries, and between China and Australia; Spring Airlines’ fee adjustments mainly involve routes to Japan, South Korea, Thailand, Vietnam, and Malaysia; Changlong Airlines adjusted fuel surcharges for routes between China and Thailand, Singapore, Malaysia, and Kazakhstan.

On domestic routes, the standard that has been in effect since January 5, 2026, remains: for segments of 800 kilometers (inclusive) or less, a fee of 10 yuan is charged per passenger, and for segments over 800 kilometers, a fee of 20 yuan is charged. However, there are also voices suggesting that if international oil prices continue to run high, there is a possibility of increasing the fuel surcharges on domestic routes.

Fuel generally accounts for about 30% of airline operating costs.

The sensitivity of the aviation industry to fuel prices is first reflected in the cost structure. Senior aviation expert and professor at Guangdong University of Foreign Studies, Guo Jia, explained that the proportion of fuel costs varies among major airlines but is typically around 30% of operating costs.

According to information collected by reporters, in 2024, the aviation fuel costs for Air China, China Eastern Airlines, and China Southern Airlines were 53.72 billion yuan, 45.499 billion yuan, and 54.989 billion yuan, respectively, accounting for 33.96%, 35.97%, and 34.46% of total costs. Additionally, according to the “2025 Mid-term Credit Observation of China’s Civil Aviation Industry,” the proportion of aviation fuel costs in the operating costs of the civil aviation transportation industry for 2022-2024 and the first half of 2025 were 29.29%, 35.58%, 34.72%, and 32.13% (excluding Huaxia Airlines for the half-year).

To alleviate the cost pressure brought by rising oil prices, domestic routes have established a fuel surcharge linkage mechanism. According to current rules, when the comprehensive procurement cost of domestic aviation kerosene exceeds 5,000 yuan/ton, airlines can collect surcharges according to a formula. A calculation by Zheshang Securities shows that assuming Brent oil at $80 per barrel and Singapore jet fuel at $110 per barrel, the corresponding average surcharge is about 72 yuan per person, which has a relatively high coverage rate for fuel costs in a static view.

However, in reality, in the highly market-oriented civil aviation market, when jet fuel prices soar, the resulting cost increase is difficult to effectively pass on to consumers.

Guo Jia explained in an interview that when airlines raise surcharges, they often need to lower base ticket prices to maintain travelers’ overall travel costs, which significantly undermines the hedging effect of surcharges, “because travelers pay the total cost—ticket price plus fuel surcharge. If the total price is significantly higher than high-speed rail, travelers might choose not to fly.”

This situation also exists on international routes. Li Xiaojin, director of the Aviation Economy and Development Research Institute at Civil Aviation University of China, analyzed that while airlines can partially offset the losses from rising fuel costs by significantly increasing fuel surcharges, this measure has its limits. “If the total cost is too high, exceeding consumer affordability, travelers may choose other airlines’ international detours, which constrains the increase in fuel surcharges,” he said.

Of course, in different market environments, the impact of fuel surcharge changes on corporate performance varies. When demand is strong and fuel prices rise, airlines have a certain ability to absorb costs. However, when high oil prices coincide with weak demand, it can lead to further industry losses. A look back at the recent two high oil price cycles provides more convincing evidence.

According to a report by Zheshang Securities, in 2018, the average price of Brent crude oil rose from $55 per barrel to $72 per barrel, an increase of 31%. That year, the average fuel surcharge on domestic routes was 11 yuan per person, contributing to a ticket price increase of about 1.4%. However, benefited by the reform of domestic route ticket prices and the opening of price ceilings, the domestic revenue levels of the three major airlines improved overall, and even excluding fuel surcharges, they remained relatively stable with a slight increase, leading to a slight improvement in profits after accounting for currency exchange.

However, the situation in 2022 was completely different. The combination of the Russia-Ukraine conflict and global refining capacity recovery delays led to a 40% increase in Brent crude oil prices, while the average price of Singapore jet fuel surged by 70%. That year, the average fuel surcharge rose to 96 yuan per person, contributing to a ticket price increase of 12% to 13%. However, under the special circumstances at that time, the domestic passenger turnover of the three major airlines fell by 40% year-on-year, and even excluding fuel surcharges, base ticket prices decreased instead of increasing.

Airline strategies extend far beyond mere “price increases.”

Against this backdrop, airlines are adopting multi-dimensional response strategies.

Raising fuel surcharges is the most direct method of passing on costs. However, relying solely on increasing fuel surcharges has proven insufficient to fully cover the skyrocketing costs, especially in extreme market conditions with volatile oil prices. Therefore, futures and derivatives hedging are becoming the “ballast” for airlines’ stable operations.

China Eastern Airlines recently announced that aviation fuel, as one of the company’s largest operating costs, has a significant impact on its profitability due to price fluctuations. The company plans to engage in aviation fuel hedging business in 2026 to partially offset the adverse effects of oil price fluctuations on its operations. Cathay Pacific revealed that approximately 30% of its fuel has already been hedged for 2026, while Finnair’s hedging ratio in the first quarter exceeded 80%.

In this regard, Li Xiaojin cautioned that airlines engaging in fuel hedging must be wary of potential risks. If costs are locked in at current prices, a decline in oil prices in the future could turn the hedge into a burden. There have been many historical lessons where blind operations led to losses. A more prudent approach is to participate moderately: both use hedging to offset short-term oil price fluctuations, avoiding sudden cost increases; and not bet everything, retaining flexibility for adjustments. By reasonably balancing risk and return, it is possible to control risks while balancing cost stability and market responsiveness.

When oil prices remain high for an extended period, adjusting capacity also becomes an option. United Airlines stated that in response to potentially high oil prices lasting until the end of 2027, it will reduce about 5% of its capacity in the second and third quarters of this year, suspending inefficient routes to Tel Aviv, Dubai, and concentrating resources on high-profit markets.

Interestingly, the high oil price cycle unexpectedly accelerated the aviation industry’s green transformation. The year 2025 is viewed by the industry as the “mandatory year” for global SAF (Sustainable Aviation Fuel), as the EU’s ReFuelEU Aviation regulation requires a blending ratio of 2% for SAF by 2025, rising to 6% by 2030; China, in its 2026 government work report, has also included “green fuels” as a new growth point for the first time.

However, it should be noted that the cost of SAF is several times that of traditional jet fuel. Based on this, the industry is actively exploring cost-sharing mechanisms. In March of this year, China’s first commercial demonstration project for SAF covering the entire chain from “production, storage and transportation, refueling, combustion, to rights confirmation,” the “Spark Project,” was launched in Chengdu, with participation from airlines such as China Southern Airlines and Sichuan Airlines. This project achieved the cross-industry circulation and value transformation of SAF environmental rights for the first time, allowing companies purchasing SAF emission reduction rights to share the premium costs, providing a replicable “Chinese solution” for the large-scale application of SAF. With the implementation of the EU mandate and the deepening of China’s “dual carbon” goals, the application ratio of SAF is expected to rise rapidly, which may be a necessary path for the aviation industry to reshape its cost structure and break free from dependency on fossil fuels.

Li Xiaojin stated that SAF not only promotes energy conservation and emissions reduction but also reduces the reliance of Chinese civil aviation on imported fuel, which should be elevated to ensure national energy security and promote vigorously.

(Edited by: Wenjing)

Keywords:
Aviation