**China-Japan Standoff Poses Challenges for Chinese Airlines’ Profitability**
The ongoing tensions between China and Japan are likely to worsen an already weak season for Chinese airlines, complicating their efforts to achieve their first annual profit in six years. Recent comments by Japanese Prime Minister Sanae Takaichi regarding Taiwan have escalated tensions, prompting China to implement flight restrictions to Japan as part of broader economic retaliatory measures.
Jason Sum, an analyst at DBS Bank Ltd., noted that this situation will likely lead to a significant earnings impact, creating risks to current consensus projections. He anticipates that the pressure on earnings will persist into early 2026. China Eastern Airlines Corp., the largest operator of flights between the two nations, is particularly vulnerable to a decline in demand compared to its competitors, China Southern Airlines Co. and Air China Ltd. Additionally, smaller but profitable airlines like Spring Airlines Co. and Juneyao Airlines Co. are also at risk.
According to Bloomberg calculations, China’s “Big Three” airlines have incurred combined losses of 206.4 billion yuan from 2020 to 2024, primarily due to the pandemic and increasing domestic competition. Despite attempts to reach out for comments, China Eastern, China Southern, and Air China did not respond.
The flight restrictions are expected to further squeeze earnings during a fragile period, as noted by Parash Jain, an analyst at HSBC Holdings Plc. Typically, Chinese airlines experience a downturn in demand following the National Day holidays in October, with no significant holidays until the Lunar New Year in January or February.
To adapt, Chinese airlines are reallocating spare capacity to destinations such as Thailand and South Korea. Additionally, relaxed visa policies for Chinese travelers to Russia present new opportunities for these carriers. Data from Morgan Stanley indicates that the number of daily scheduled flights from China to Japan was reduced by nearly 50% in December alone, with an average reduction of 38% expected through the end of March. In contrast, scheduled bookings to Thailand have surged by almost 40% since mid-January to compensate for the cuts to Japan.
Despite these challenges, Japan remains the most lucrative route for Chinese airlines in terms of passenger yield—the average revenue earned per paying passenger per mile. However, as airlines shift capacity to other routes, there may be additional pressure on their already strained passenger yields. While these adjustments may not significantly impact fourth-quarter earnings, they could affect the first quarter.
On a more positive note, long-term fundamentals show promise, as a stronger yuan is making jet fuel purchases cheaper amid declining fuel prices. Although political factors may influence the industry in the short term, they are not expected to be a major hindrance in the long run.
**FAQ**
**Q: How are Chinese airlines responding to the flight restrictions to Japan?**
A: Chinese airlines are reallocating capacity to other destinations like Thailand and South Korea and are exploring new opportunities, such as relaxed visa policies for travelers to Russia, to mitigate the impact of the flight restrictions.