China Merchants Securities: Building supply and demand in the aviation sector, focusing on the profit elasticity of the industry in '26

The Zhitong Finance App learned that China Merchants Securities released a research report stating that the future trend of supply and demand recovery and profit recovery in the aviation industry is clear. From a medium- to long-term perspective, the continued rise in industry profits will support the restoration of market value. In the short term, Q4 benefits from increased demand and a steady recovery in ticket prices. The off-season is expected to reduce losses sharply year on year, and 25 is expected to be the first year for Air to reverse losses; the 26th Spring Festival travel season is expected to benefit from increased demand, a year-on-year decline in aviation fuel prices, and a sharp year-on-year increase in profits. The whole of '26 is expected to be the first year for Air to release profit flexibility.

The main views of China Merchants Securities are as follows:

2025 industry review: supply and demand bottomed out, domestic naked ticket prices basically stopped falling throughout the year

(1) Driven by the increase in aircraft fleet size and utilization rate restoration, the industry ASK was +6% year-on-year from January to November 2025, and +17.1% compared to the same period in 2019. As the utilization gap narrows, the industry's capacity growth normalized and gradually decelerated; (2) Benefiting from the rapid recovery of international routes, the aviation demand side maintained relatively rapid growth in 2025. From January to November 2025, the country's civil aviation passenger turnover was +8.3% year-on-year, +19.6% compared with the same period in 2019; China's internal passenger passenger turnover was +4.5% year-on-year in 2024, +25.5% compared to the same period in 2019; international civil aviation passenger turnover was +22.9% year-on-year in 2024, +3.6% compared to the same period in 2019; (3) Benefiting from increased demand, the industry continued to reach new highs in 2025. The average passenger occupancy rate for domestic aviation from January to November 2025 was 85.2%, up 1.8 percentage points from the same period in 2019; (4) Fares during the peak season in '25 were under year-on-year pressure. The off-season benefits were concentrated and the base was lower, and the year-on-year performance of ticket prices was stronger than during the peak season. On a year-on-year basis, domestic bare ticket prices basically stopped falling. Among them, Q4 is expected to increase both naked and fuel-containing fares. According to flight manager data, in the first 50 weeks of 2025 (2025/1/3 to 2025/12/18), the average domestic naked ticket price was 704 yuan, -1.8% compared to 2024; the fuel included ticket price was 717 yuan, -5.5% compared to 24 years. Among them, since Q4, bare ticket prices have increased 2.9% year on year, fuel ticket prices have increased 2.5% year on year, and Q4 ticket prices have been corrected year on year, indicating that supply and demand have been reversed in a single quarter against the backdrop of relatively rapid growth in demand.

Looking ahead: reversal of supply and demand, improvement of oil transfer conditions

(1) Supply side: Assuming the growth rate of the introduction of integrated aircraft and the growth rate of the number of hours used by aircraft, the entire industry's supply is expected to grow at an average compound annual rate of 5.2% in 2025-27; (2) On the demand side, based on domestic and international demand assumptions, the overall industry demand is expected to increase by more than 6.6% per year in 2025-27, with both sides of the comprehensive supply and demand side. It is expected that the industry's supply and demand relationship will continue to improve in 2025-27, driving the recovery of industry earnings levels and profitability; (3) Looking ahead to 2026, benefiting from increased crude oil production and the advancement of Russian-Ukrainian peace negotiations, crude oil prices are expected to decline further at the same time. The RMB is expected to continue its moderate appreciation trend and drive profit improvement.

The supply and demand of the industry improved in 2025-27, and the medium-term upward trend was clear

On the demand side, the industry is in the recovery phase after the epidemic. Consumer demand for travel is resilient. Economic stabilization and consumer stimulus policies are favorable to the growth of domestic travel demand, and the visa-free policy is expected to accelerate the growth in demand for international routes. On the supply side, affected by poor global aircraft supply chains, supply releases are tight. The size of the civil aviation fleet is expected to maintain steady growth, the supply growth rate will continue to slow, and supply and demand will improve. Oil remittance factors. As OPEC+ organizations increase production, oil prices are expected to continue to fall year on year, directly reducing costs, which is beneficial to demand recovery and profit growth; at the same time, RMB is expected to continue the upward trend and improve profits in '26. Looking forward to the future, there is a clear trend of recovery in supply and demand in the industry and a recovery in profits. From a medium- to long-term perspective, the continued rise in industry profits will support the restoration of market value. In the short term, Q4 benefits from increased demand and a steady recovery in ticket prices. The off-season is expected to reduce losses sharply year on year, and 25 is expected to be the first year for Air to reverse losses; the 26th Spring Festival travel season is expected to benefit from increased demand, a year-on-year decline in aviation fuel prices, and a sharp year-on-year increase in profits. The whole of '26 is expected to be the first year for Air to release profit flexibility.

Risk warning: macroeconomic growth fell short of expectations; supply growth exceeded expectations; international flight recovery fell short of expectations; oil prices rose sharply, and RMB depreciated sharply.