There is a particular kind of institutional memory that sits at the heart of Beijing’s relationship with its state-owned airlines. In 2020, when the pandemic grounded aircraft across the world and China’s rigid lockdown policies kept its skies emptier than almost any other major economy, the government stepped in with a rescue package that became one of the largest aviation lifelines in history. Grants, subsidised loans, tax relief — the instruments of state support were deployed with speed and scale that only a government with both the mandate and the financial firepower to act could manage.
Six years later, that memory is being invoked again. According to people familiar with the matter who spoke to Bloomberg News, China is considering a fresh package of financial relief measures for its three largest state-owned carriers — Air China, China Eastern Airlines, and China Southern Airlines — as the Iran war drives jet fuel prices to levels that are straining already-fragile balance sheets. Government subsidies, preferential tax treatment, state-backed low-interest loans, and even airline mergers are all reportedly on the table. No final decisions have been announced, and none of the three carriers, the Civil Aviation Administration of China, or the State-owned Assets Supervision and Administration Commission have commented publicly on the deliberations.
But the fact that those deliberations are reportedly underway tells its own story about the severity of what the Iran war has done to Chinese aviation.
The Vulnerability That This Crisis Exposed
To understand why China’s airlines are in particular difficulty, it helps to understand a structural weakness that the Iran war has exposed rather than created: the near-total absence of fuel hedging among China’s major carriers.
Fuel hedging — the practice of locking in future fuel prices through financial derivatives — is standard risk management for airlines operating in volatile energy markets. Airlines that hedge well can insulate themselves from short-term price spikes and maintain financial stability long enough to adjust their operations. Many European carriers entered 2026 with hedging positions that offered at least some protection for the first several months of the year. The picture for Chinese carriers was starkly different.
China Eastern was the only member of the Big Three to manage jet fuel price risk through hedging in 2025, and even its position was modest — 500,000 barrels of outstanding hedge contracts as of December 31, 2025, scheduled to expire in 2026. Air China and China Southern had essentially no hedging protection. According to Nathan Gee, head of Asia-Pacific transport research at Bank of America, this left all three carriers directly exposed to spot-market price movements — precisely the scenario that has unfolded since the US-Israel war on Iran began on February 28, triggering the closure of the Strait of Hormuz and the disruption of energy flows that normally supply roughly 20% of the world’s oil and gas.
The financial consequences have been immediate and measurable. Jet fuel accounts for between 35% and 38% of the Big Three’s operating expenses, according to HSBC analysts — a figure that makes fuel costs the single largest variable cost driver in their business. China Eastern’s own sensitivity analysis showed that a 5% move in average jet fuel prices produces a 2.2 billion yuan impact on total profit. Jet fuel prices have not moved 5%. They have more than doubled since the war began, according to Reuters data. The arithmetic of what that means for three airlines already carrying debt-to-equity ratios above 200% — itself already high relative to regional peers, as Gee noted — is not comforting.
The Balance Sheet Before the Crisis Even Started
The critical context for understanding why Beijing may feel compelled to act is that China’s Big Three were not entering this oil shock from a position of financial strength. Between 2020 and 2025, the three carriers collectively accumulated losses of approximately 209 billion yuan — equivalent to roughly $29 billion US dollars — according to Bloomberg data compiled from their annual reports. Of the three, only China Southern managed to post a full-year profit in that entire period, and only once, in 2025.
The pandemic had been financially devastating. China’s zero-COVID policy, maintained long after most of the world had reopened, kept travel demand suppressed through 2022 and into early 2023. When restrictions finally lifted, the expected revenge-travel boom materialised domestically but the international recovery was slower and more uneven than Chinese airlines had hoped. Overcapacity in the domestic market — a structural problem that predates the pandemic, fuelled in part by decades of government-subsidised expansion — continued to push down domestic fares and compress margins.
The Big Three received more than 120 billion yuan in government grants and subsidies in the decade through 2025, according to Bloomberg’s analysis of their annual reports. That history of state support is precisely why analysts are now asking whether the Covid playbook will be revisited — and why the answer appears, at least at the level of preliminary deliberation, to be yes.
Nathan Gee of Bank of America put it plainly to Bloomberg: “Elements of the Covid playbook could return. During Covid, the Chinese government supported airlines through cost relief. Further consolidation of smaller airlines by the Big Three cannot be ruled out given the additional financial stress ahead.”
A Supply-Side Shock, Not a Demand-Side One
One aspect of the current crisis that distinguishes it from the pandemic deserves particular attention: this is a supply-side shock, not a demand-side one.
During Covid, the problem was simple — nobody was flying. Revenue collapsed, but costs could be cut alongside it. Aircraft could be parked. Staff could be furloughed. The mismatch between revenue and cost was painful but structurally straightforward to address through demand-side interventions such as grants and low-interest loans to bridge the liquidity gap.
The Iran war’s impact on Chinese aviation is structurally different. Passengers are still flying. Domestic demand has been recovering, and the Big Three had all pointed to a renewed international push as a growth driver entering 2026. The problem is that the fuel required to carry those passengers now costs dramatically more, and that cost cannot be easily reduced by cutting capacity without also cutting the revenue that partially offsets it. Every aircraft that flies burns expensive fuel. Every aircraft that is grounded saves fuel costs but foregoes ticket revenue. There is no clean solution.
The fuel surcharge mechanism that China uses to pass some fuel cost increases onto passengers offers only partial relief. Chinese regulations mean the surcharge adjustments typically lag market movements and rarely fully offset rising costs — a structural limitation that HSBC analysts specifically flagged as likely to erode margins even in scenarios of partial price recovery.
That domestic fuel surcharges were raised on April 5 — just weeks after the war began — signals both the speed of the pressure and its limits as a coping mechanism. Raising surcharges helps at the margin. It does not close a gap created by more than doubling jet fuel prices.
What the Government Is Weighing
The measures reportedly under consideration cover a spectrum from immediate financial relief to structural restructuring. Subsidies and preferential tax treatment would provide direct cost relief. State-backed low-interest loans would address the liquidity strain of operating with losses while carrying debt-to-equity ratios already above 200%. Merger considerations, if they advance, would represent a longer-term structural response — a recognition that the current crisis may expose weaknesses that go beyond a temporary fuel shock.
Bloomberg Intelligence analyst Eric Zhu offered a note of comparative perspective: the Big Three are carrying higher cash positions today than they held in 2019, and are not, in his assessment, approaching financial distress. That framing matters — Beijing is not being asked to rescue carriers on the verge of insolvency. It is being asked to decide how much financial stress the state-owned aviation sector should absorb before public support is deployed.
For a government that controls the carriers directly, that decision is as much political as financial. China’s Big Three are not merely commercial enterprises. They are instruments of domestic connectivity, tools of economic policy, and symbols of national capability in an aviation market that Beijing has spent decades building into one of the world’s largest. Letting them absorb unsupported losses on a scale last seen during the pandemic — from a shock caused by a war in which China is not a participant — is not a decision Beijing is likely to leave to market forces alone.
The deliberations are preliminary. The decisions, when they come, will not be.
Written by Shalin Soni, CMA specializing in financial analysis, global markets, and corporate strategy, with hands-on experience in financial planning and analytical decision-making.
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Source: Based on Bloomberg and publicly available information.
Disclaimer
This article is based on publicly available information, market developments, and credible media reports. The content is intended for informational and analytical purposes only and should not be considered financial, investment, or legal advice.