Air China Limited (601111.SH) has seen its earnings recovery trajectory abruptly interrupted. In the first half of this year, impacted by the surge in aviation fuel prices stemming from geopolitical conflicts in the Middle East, the company's net profit excluding non-recurring items plummeted by nearly 40% year-on-year, with the loss scale expanding to over 2.7 billion yuan. This marks the first year-on-year decline in Air China's interim profitability since 2023.

Despite the significant recovery of China's civil aviation market post-pandemic, Air China Limited has consistently failed to emerge from its loss-making quagmire. Behind this, in recent years, as market competition has intensified, the industry's norm of "exchanging price for volume" has become prevalent. Meanwhile, rigid expenditures such as aviation fuel, depreciation, and labor costs have surged, driving up Air China's operating costs substantially and significantly compressing the company's profit margins.

In the first half of this year, the gross margins of both Air China Limited's passenger transport and cargo & mail transport businesses turned negative. The company's overall gross margin also experienced a cliff-like drop compared to pre-pandemic levels. Furthermore, as of the end of the first half, Air China's total liabilities approached 300 billion yuan, with a short-term debt gap exceeding 36 billion yuan. The heavy financial burden continues to weigh on the company's performance. Looking ahead, the company still faces substantial capital expenditure requirements. Under the multiple pressures of insufficient core business cash generation, high leverage, and massive capital expenditures, Air China's prospects for earnings recovery remain bleak.

Q2 Performance Plunges, Dragging Down Overall Results

Air China Limited, listed on the Shanghai Stock Exchange in 2006, primarily engages in air passenger transport, air cargo, and mail transport. In the first half of this year, Air China generated revenue of 89.27 billion yuan, a year-on-year increase of 10.54%. The company reported a net loss attributable to shareholders of -2.286 billion yuan, a 26.59% decline year-on-year, compared to -1.806 billion yuan in the same period last year. The net loss excluding non-recurring items was -2.787 billion yuan, down 39.1% year-on-year, versus -2.004 billion yuan previously.

In its earlier earnings forecast, Air China Limited disclosed that the aviation market maintained steady growth in the first half. During the reporting period, the company's operational efficiency showed characteristics of "increased capacity, production, and revenue," achieving substantial profitability in the first quarter. However, due to the persistently high aviation fuel prices caused by Middle East geopolitical conflicts, the company recorded a loss for the first half.

Post-pandemic, China's civil aviation industry experienced rapid recovery, with domestic route passenger numbers and flight volumes significantly surpassing 2019 levels. International route flight volumes also recovered to over 90% of 2019 levels last year. However, in recent years, intensifying market competition has led to an industry-wide trend of "volume growth with price decline." Combined with rising rigid costs like aviation fuel and depreciation, profit margins for major airlines have notably narrowed.

In recent years, Air China Limited's revenue has continued to grow, with last year's revenue up 26% compared to 2019. However, as operating costs have climbed sharply, the company's profit space has been significantly compressed. From 2020 to 2025, Air China recorded losses for six consecutive years, with cumulative net losses excluding non-recurring items nearing 80 billion yuan.

In fact, Air China Limited's operational data for the first half was not subpar. During the period, Air China invested 180.676 billion available seat kilometers, up 1.75% year-on-year; transported 79.6983 million passengers, a 3.35% increase; passenger load factor improved by 4.02 percentage points; and revenue per revenue passenger kilometer rose 2.74% year-on-year. Nevertheless, as aviation fuel costs—the largest component of operating costs—soared 34.69% year-on-year, alongside increases in depreciation and aircraft maintenance expenses, Air China's operating costs rose 13.45% in the first half, leading to a significant decline in gross profit.

Despite a substantial year-on-year reduction in period expenses during the first half, it failed to reverse the sharp decline in profitability. On a quarterly basis, Air China Limited generated revenue of 44.54 billion yuan in Q1, up 11.28% year-on-year. Benefiting from enhanced cost controls, the company's Q1 net profit excluding non-recurring items reached 1.382 billion yuan, a surge of 164.96%, achieving a turnaround to profitability. However, in Q2, Air China's performance sharply reversed. The quarter saw revenue of 44.73 billion yuan, up 9.81% year-on-year, but operating costs rose 24.16%, causing net profit excluding non-recurring items to plunge 3453.91% to -4.169 billion yuan, swinging from profit to loss.

From 2023 to 2025, although Air China Limited's interim results remained loss-making, the loss scale narrowed each year. However, this year's first-half losses expanded again, exceeding the full-year loss of the previous year, significantly disrupting the company's previous trend of continuous loss reduction.

Both Core Business Gross Margins Turn Negative

Behind Air China Limited's lackluster performance in recent years is a notable downward trend in its gross margin. In the first half of 2019, Air China's overall gross margin stood as high as 16.13%. Within its main operations, passenger transport and cargo & mail transport accounted for 91.64% and 4.33% of revenue, respectively. In recent years, with persistently low gross margins in these segments, Air China's overall gross margin has retreated significantly.

In the first half of this year, Air China Limited's passenger transport business generated revenue of 80.33 billion yuan (89.99% of total revenue), up 9.75% year-on-year. Due to substantially higher operating costs, the segment's gross margin fell 2.72 percentage points year-on-year to -0.88%. This indicates that revenue from ticket sales in the first half could no longer cover corresponding costs, falling into the awkward position of "losing money on every ticket sold." Notably, this segment's revenue grew 34.22% compared to the same period in 2019. However, over the last three interim reports, the segment's gross margins were merely 1.65%, 1.85%, and -0.88%, hovering at breakeven levels.

Air China Limited's cargo and mail transport business faces similar pressure. In the first half, this segment's revenue reached 4.345 billion yuan (4.87% of total revenue), up 21.46% year-on-year. With operating costs rising sharply, the segment's gross margin dropped 2.65 percentage points year-on-year to -0.65%. Across the last three interim reports, its gross margins were 1.74%, 2%, and -0.65%, indicating extremely limited profit potential.

With both core businesses' gross margins turning negative, Air China Limited's overall gross margin fell to 0.43% in the first half, down 2.55 percentage points year-on-year, marking a new low for the period since 2023. Compared to the first half of 2019, this metric has dropped precipitously. It's worth noting that from 2023 to 2026, Air China's interim gross margins were 0.67%, 2.58%, 2.98%, and 0.43%, respectively, all significantly below pre-pandemic levels, suggesting the margin weakness is not a short-term fluctuation. Beyond higher fuel costs, this is closely linked to continued industry capacity expansion and intensifying competition in recent years.

In its 2026 interim report, Air China Limited disclosed that the civil aviation industry currently faces dual pressures from peer competition and high-speed rail network diversion. To address market competition, the company will adhere to its hub network strategy, focusing on building the Beijing and Chengdu dual hubs, prioritizing the "four poles and clusters" strategic markets, and achieving differentiated development from other market competitors. Additionally, the company will continue to enhance its competitive domestic and international route network, launch efficient domestic trunk and express products, and consolidate core market competitiveness. The company also believes that civil aviation should leverage its comparative advantages by increasing capacity investment on long-haul domestic and international routes, and providing public transport services to remote areas to counter substitution competition.

Massive Debt Overhang, Short-Term Debt Gap Exceeds 36 Billion Yuan

Air China Limited also confronts dual pressures of high leverage and insufficient liquidity. In recent years, to maintain fleet size and route network layout, Air China's capital expenditures have remained elevated, driving a substantial increase in its debt scale. As of the end of last year, the company's total liabilities and debt-to-asset ratio stood as high as 303.8 billion yuan and 88.56%, respectively. To alleviate liquidity pressures, Air China has employed various measures in recent years, including private placements and asset sales, but with limited effect. In May this year, the company raised net proceeds of 19.99 billion yuan through a private placement, intended entirely for debt repayment and working capital replenishment. By the end of June, 16.875 billion yuan of these funds had been utilized. Yet, the company's total liabilities and debt ratio remained at 295.4 billion yuan and 83.87%, respectively.

The high debt level has significantly increased Air China Limited's financial burden. In the first half of this year, the company's financial expenses reached 1.722 billion yuan, with interest expenses (excluding capitalized portions) amounting to 2.409 billion yuan, equivalent to -86.45% of its net profit excluding non-recurring items. More critically, Air China still faces heavy capital expenditure pressures ahead. As of the end of June, the company planned payments for aircraft and related equipment acquisitions over the coming years totaled 101.38 billion yuan.

In July this year, Air China Limited disclosed another aircraft purchase plan. According to the company, it and its controlling subsidiary Shenzhen Airlines signed aircraft purchase agreements with Airbus, collectively procuring 55 aircraft. The aggregate catalog price for this transaction reached as high as 84.51 billion yuan (with actual transaction prices expected to be lower). The aircraft will be delivered in batches from 2029 to 2032. Funding sources include the company's own funds, commercial bank loans, and other financing methods. Air China stated that this transaction will help optimize its fleet composition and route network structure, enhance route operational efficiency and service quality, and robustly support future capacity deployment. It also aids the company in continuously reducing unit operating costs and supporting its dual-carbon goals.

As of the end of June, Air China Limited held monetary funds and trading financial assets totaling 15.792 billion yuan, while short-term borrowings and non-current liabilities due within one year amounted to 52.534 billion yuan, leaving a short-term debt gap of over 36 billion yuan. This implies that Air China will still need to fill the funding gap through large-scale financing or asset disposals, which will further elevate its financial leverage and interest burden, adding greater pressure on its already loss-making performance.