China's Big Three Airlines: Strategic Resilience and Valuation Potential Amid Geopolitical Headwinds

China’s Big Three airlines—Air China, China Eastern, and China Southern—have endured a prolonged period of financial strain, marked by consecutive years of losses driven by geopolitical tensions, weak international demand, and economic volatility. Despite these challenges, the carriers have demonstrated strategic resilience through cost-cutting measures, operational efficiency improvements, and a pivot toward freight-driven revenue. However, their path to profitability remains fraught with uncertainty, as global trade dynamics and currency fluctuations continue to weigh on their valuations.

Financial Performance: A Narrowing, But Persistent, Red

The airlines’ financial struggles have persisted into 2025, though losses have contracted compared to earlier years. Air China reported a net loss of CNY 2.37 billion in 2024, a 77% reduction from its 2023 loss of CNY 8.17 billion [3]. China Southern narrowed its loss to CNY 1.7 billion in 2024 from CNY 4.14 billion the prior year [3], while China Eastern saw a 48% reduction in losses to CNY 4.2 billion [3]. For the first half of 2025, the combined second-quarter loss of the Big Three ranged between CNY 452 million and CNY 1.8 billion, with China Southern bearing the largest burden at CNY 800 million [1]. These figures reflect a gradual improvement but underscore the sector’s fragility.

The carriers’ struggles stem from a mix of domestic and international headwinds. Domestic competition has driven down airfares and passenger yields, with economy-class fares falling 12.1% year-on-year [2]. Meanwhile, international capacity remains approximately 20% below pre-pandemic levels, hampered by geopolitical tensions and lingering travel bottlenecks [2]. The depreciation of the yuan has further eroded margins, compounding the impact of low yields [1].

Strategic Resilience: Cost-Cutting, Fleet Expansion, and Freight Focus

To counter these pressures, the Big Three have prioritized cost control and operational efficiency. Air China and China Southern have tightened cost management, while China Southern reported a 6.69% year-on-year increase in passenger traffic in June 2025, driven by expanded international routes [4]. A notable strategic shift is the carriers’ focus on freight operations, which have outperformed passenger segments. Air China Cargo is projected to generate CNY 1.8–2 billion in profit, while China Southern Cargo expects a 72% earnings increase to CNY 4.2 billion [3]. This pivot aligns with the surge in cross-border e-commerce, a sector the airlines are positioning themselves to capitalize on.

A landmark development in Q3 2025 is the near-finalization of a 500-aircraft order by the Big Three with Airbus and Boeing [2]. This historic deal, valued in the tens of billions, signals a commitment to fleet modernization and capacity expansion. While the order could enhance long-term competitiveness, it also raises questions about the carriers’ ability to absorb debt and maintain profitability in a volatile market.

Valuation Potential: A Balancing Act

The airlines’ valuation metrics remain challenging. Despite reduced losses, their earnings before interest, taxes, depreciation, and amortization (EBITDA) margins remain negative, and debt-to-equity ratios are elevated. However, their freight divisions and domestic passenger recovery offer a glimmer of hope. Analysts suggest that profitability could materialize if the carriers refine route strategies, such as through code-sharing partnerships or regional hub optimization [2].

A critical factor is the global e-commerce boom, which has buoyed air cargo demand. China Southern’s efforts to expand Asia-Pacific freight routes and Air China’s stake in Cathay Pacific provide diversification benefits [1]. Yet, these gains are offset by geopolitical risks, including U.S.-China trade tensions and the potential for further yuan depreciation.

Conclusion: A Path Forward, But With Caution

China’s Big Three airlines exemplify strategic resilience in a sector defined by geopolitical and economic vulnerability. Their cost-cutting initiatives, freight-focused strategies, and fleet modernization efforts position them to navigate short-term challenges. However, their valuation potential hinges on the resolution of macroeconomic uncertainties and the successful execution of long-term operational reforms. For investors, the carriers represent a high-risk, high-reward proposition—one where patience and a nuanced understanding of global trade dynamics will be essential.

Source:
[1] China's big three airlines post combined second quarter loss, [https://aviationnews-online.com/public/article/chinas-big-three-post-combined-second-quarter-loss]
[2] China Southern, Air China, and China Eastern Near Historic Deal for Five Hundred Aircraft from Airbus and Boeing, Marking a Milestone in Aviation Expansion [https://www.travelandtourworld.com/news/article/china-southern-air-china-and-china-eastern-near-historic-deal-for-five-hundred-aircraft-from-airbus-and-boeing-marking-a-milestone-in-aviation-expansion/]
[3] China's Big Three Airlines Shrink Losses in ... [https://www.yicaiglobal.com/news/chinas-big-three-airlines-failed-to-turn-profitable-last-year]
[4] China Southern Airlines' Passenger Recovery and Cargo ... [https://www.ainvest.com/news/china-southern-airlines-passenger-recovery-cargo-momentum-strategic-buy-resilient-aviation-sector-2508/]