A fresh diplomatic standoff between China and Japan is casting a shadow over the recovery of China's aviation sector, threatening to derail its chance of posting a first annual profit in six years. The tensions, sparked by recent remarks from Japanese Prime Minister Sanae Takaichi concerning Taiwan, have led Beijing to impose economic retaliatory measures, including restrictions on flights to Japan.
Earnings Under Pressure from Politics and Season
This geopolitical friction arrives during a seasonally weak period for the industry, exacerbating existing challenges. Analyst Jason Sum from DBS Bank Ltd. warns that this development will undoubtedly result in an earnings hit, creating downside risk to current market projections. He anticipates the earnings pressure to persist into early 2026.
The impact is not uniform across carriers. China Eastern Airlines Corp., as the biggest operator of flights between the two nations, is the most exposed to a pullback in demand, more so than China Southern Airlines Co. and Air China Ltd. However, even smaller, traditionally profitable airlines like Spring Airlines Co. and Juneyao Airlines Co. are vulnerable to the downturn.
The backdrop is already grim. Bloomberg calculations reveal that China's 'Big Three' carriers—China Eastern, China Southern, and Air China—have suffered combined losses of a staggering 206.4 billion yuan from 2020 to 2024. These losses were driven by the pandemic and fierce domestic competition. The companies did not respond to requests for comment on the latest situation.
HSBC Holdings Plc analyst Parash Jain notes that flight curbs would squeeze earnings further in an already fragile quarter. Demand typically plunges after China's National Day holidays in October, with no major travel boost until the Lunar New Year in January or February.
Airlines Scramble to Mitigate the Damage
In response, Chinese airlines are moving quickly to redeploy capacity. Spare aircraft are being shifted to other international routes, notably to destinations like Thailand and South Korea. Relaxed visa policies for Chinese travelers to Russia are also opening up new opportunities for carriers seeking alternative revenue streams.
Data from airline schedule provider OAG, cited by Morgan Stanley, shows the scale of the shift. The number of daily scheduled flights from China to Japan was cut by almost 50% in December alone, with an average reduction of 38% expected through the end of March. In a clear pivot, scheduled bookings to Thailand have surged by nearly 40% from mid-January to offset the Japan cuts.
However, this strategic shift comes at a cost. According to Bloomberg Intelligence analyst Eric Zhu, Japan has been the most profitable route for Chinese airlines in terms of passenger yield—the revenue earned per passenger per mile flown. As carriers divert capacity to other, potentially less lucrative routes, added pressure is expected on their already weak passenger yields, which could impact first-quarter 2025 results.
Long-Term Fundamentals Offer Some Hope
Despite the near-term headwinds, several factors provide a basis for longer-term optimism. A stronger Chinese yuan is making it cheaper for airlines to purchase jet fuel, a major cost component, and global fuel prices have been trending downward.
Market experts also believe the political impact may be short-lived. Cusson Leung, Chief Investment Officer at KGI Asia Ltd., stated that while politics could hurt the industry temporarily, it should not pose a major long-term drag as travelers can simply choose alternative destinations.
Furthermore, Morgan Stanley analysts, led by Qianlei Fan, point to rising inbound travel to China as a major growth driver. International passengers are generally less cost-conscious than domestic leisure travelers, allowing airlines to apply more effective tiered pricing strategies. A sustained recovery in business travel is also expected to further support airlines' pricing power in the future.
While the road to profitability remains bumpy, the industry's adaptive strategies and improving cost environment suggest the current crisis may be a turbulent patch rather than a permanent descent.
