India’s aviation sector faces short-term turbulence but growth outlook stable: ICRA

India’s aviation industry is going through a challenging phase marked by flight disruptions, regulatory changes and rising costs, but its long-term growth prospects remain stable, according to a new report by rating agency ICRA.

ICRA has retained a “stable” outlook for the sector, even as it expects airlines to collectively report a net loss of ₹170–180 billion in FY2026. The agency said that recent disruptions affecting passenger traffic are likely to be temporary and should ease over time.

Passenger growth slows in FY2026

ICRA has revised its forecast for domestic air passenger traffic in FY2026 to a modest growth of 0–3%, with total passengers expected to reach around 165–170 million. This is a sharp slowdown from its earlier estimate of 4–6% growth.

The downgrade comes after several adverse developments, including:

• Cross-border geopolitical tensions,
• The impact of a fatal aircraft accident in June 2025, and
• A decline in business travel due to global economic headwinds, including higher US tariffs.

A major factor behind the slowdown was a serious operational disruption at IndiGo between December 3 and December 8, 2025, which resulted in the cancellation of nearly 4,500 flights across the network.

Stricter duty rules trigger disruptions

According to ICRA, the disruptions were largely caused by the implementation of stricter Flight Duty Time Limitation (FDTL) rules. These include tighter restrictions on night duties and landings, which, combined with bad weather and technical issues, severely affected flight schedules.

IndiGo, which operates with very high aircraft utilisation and relies heavily on night operations, was particularly affected due to its limited operational flexibility compared to other airlines.

As a result, domestic passenger traffic in December 2025 fell by 3.9% year-on-year to 14.34 million passengers. However, airlines continued to fly with high occupancy, as the passenger load factor remained strong at around 94 per cent, showing that demand for air travel remains robust.

Rising costs put more financial pressure

Airlines are also facing intense financial pressure. Aviation fuel remains the single largest expense, accounting for 30–40% of operating costs. In addition, many major expenses such as aircraft leases, maintenance and spare parts are paid in US dollars.

The weakening of the rupee against the dollar in the second quarter of FY2026 led to significant foreign exchange losses for airlines, many of which have not yet been fully realised on their balance sheets.

Operational challenges have also been worsened by global supply-chain constraints. As of March 2025, around 133 aircraft across Indian airlines were grounded due to engine-related issues, representing about 15–17% of the total industry fleet.

Recovery expected in FY2027

Despite these challenges, ICRA expects a stronger recovery in FY2027, with domestic passenger traffic projected to grow by 6–8%. While many airlines continue to face pressure on their credit metrics and liquidity positions, some are supported by the financial strength of their parent companies.

In the short term, some relief has come from the aviation regulator. The Directorate General of Civil Aviation (DGCA) has granted IndiGo temporary exemptions from the new FDTL rules until February 10, 2026. ICRA believes this will help airlines stabilise operations and support a partial recovery in passenger traffic growth in the coming weeks.

Overall, while India’s aviation sector is facing short-term turbulence, ICRA remains confident that the industry’s long-term growth trajectory remains intact.