Caitong Securities Co.,Ltd. has released a research report indicating that on the supply side, with upstream aircraft manufacturers facing bottlenecks in production capacity recovery, the industry's supply is expected to remain tight in the medium-to-long term, with cargo aircraft supply being even more constrained than passenger aircraft.

On the demand side, the high prosperity of Chinese exports is fueling cargo traffic growth. Among these, cross-border e-commerce small parcel demand shows resilience, while the surge in AI industry chain demand provides incremental volume for air freight. This supports a high cargo sector boom, leading to strong pricing power, with freight rates expected to stabilize. Passenger demand maintains medium-to-long-term resilience, and if fuel surcharges decline, it could further stimulate travel demand. The continued improvement in the industry's medium-to-long-term supply-demand dynamics will support higher yields, and if oil prices fall, profit elasticity may emerge.

Where the growth drivers lie

Air cargo demand, boosted by AI-related and cross-border e-commerce growth, is supporting a prosperous air freight cycle. In the first half of 2026, China's international route cargo and mail traffic increased 14% year-on-year, primarily driven by the surge in global AI industry chain demand and resilient cross-border e-commerce growth.

In this high oil price environment, the air cargo market has demonstrated strong resilience, with better pricing power than passenger transport. Cargo airlines achieved double-digit revenue growth in 1H26. However, high oil prices caused gross margins to decline year-on-year. Eastern Air Logistics saw its net profit attributable to shareholders increase 10% to RMB 1.4 billion, China Southern Airlines Logistics reported a 19% increase to RMB 1.9 billion, while Air China Cargo experienced a 26% drop in profitability.

The impact on passenger carriers

High oil costs have widened losses for the major network airlines, while Spring Airlines' profitable second quarter underscores its low-cost advantage. In 1H26, the three major state-owned airlines expanded their losses, while private carriers maintained profitability. In the first quarter, the improved supply-demand dynamics were initially validated, with all seven listed airlines turning profitable, posting a cumulative net profit of RMB 8.1 billion, a year-on-year increase of RMB 10.5 billion.

However, in the second quarter, a spike in oil prices hit demand, leading to significant losses. The seven listed airlines reported a combined net loss of RMB 14.8 billion in Q2, a decrease of RMB 14.4 billion year-on-year. Only Spring Airlines managed to stay profitable, earning RMB 60 million, highlighting its high efficiency and low-cost model.

Beyond core passenger operations, Air China recognized approximately RMB 1.2 billion in investment income from its stake in Cathay Pacific during 1H26, up RMB 20 million year-on-year. China Southern Airlines' consolidated subsidiary China Southern Airlines Logistics contributed RMB 1.05 billion to its net profit in 1H26, an increase of around RMB 170 million year-on-year.

Additionally, Air China and China Eastern Airlines have deferred some aircraft delivery plans from 2026-2027 to 2028, pointing to tighter supply over the medium term.

Airport performance and shareholder returns

Airport cargo operations have outperformed passenger services. Revenue has grown steadily, but profits are diverging due to different capacity cycles. In Q2's high oil price environment, throughput growth slowed sequentially. International routes were the main driver of passenger growth, while cross-border logistics demand remained robust. In 1H26, Shanghai Airport saw its international route cargo throughput increase 16% year-on-year.

During the period, Shanghai Airport's investment income boosted profits, with net profit attributable to shareholders rising 16% to RMB 1.22 billion. Due to the commissioning of Terminal 3, Guangzhou Baiyun International Airport's cost growth outpaced revenue growth, leading to a 43% year-on-year decline in net profit to RMB 430 million. Beijing Capital International Airport returned to profitability with a net profit of RMB 20 million. Shenzhen Airport saw its net profit attributable to shareholders surge 136%, while its non-recurring adjusted net profit grew 3% year-on-year.

On shareholder returns, Spring Airlines has proposed an interim dividend of RMB 0.33 per share for 2026, representing a payout ratio of approximately 30%. Combined cash dividends and share buybacks amount to 106% of the period's net profit attributable to shareholders. Shanghai Airport plans an interim dividend of RMB 0.27 per share for 2026, with a payout ratio of roughly 55%, up from 50% in the 2025 interim period.

Key risks

Potential risks include weaker-than-expected travel demand, softness in air cargo demand, a sharp rise in oil prices, and depreciation of the Renminbi.