ICRA projects 8% domestic growth as Indian aviation recovery after turbulent FY26

After a year marked by shocks, setbacks and financial strain, India’s aviation sector may finally be preparing to leave its turbulence behind. According to credit rating agency ICRA, domestic air passenger traffic is expected to grow by up to 8% in the coming financial year, signalling a possible return to stability and moderate expansion.

The financial year 2025–26 proved to be one of the most challenging periods in recent memory for Indian aviation. What had initially appeared to be another year of robust growth quickly unravelled under the weight of multiple disruptions.

The first major blow came in the summer, when the Air India Dreamliner crash in Ahmedabad triggered widespread concern and hesitancy among travellers. Though the broader safety framework remained intact, sentiment-driven demand softening became evident in the months that followed.

The second disruption emerged during the winter season, when market leader IndiGo faced operational turbulence following the implementation of revised pilot duty time regulations. The resulting capacity constraints and scheduling challenges affected overall sector performance at a time when traffic typically peaks.

Compounding these aviation-specific challenges were several macro and geopolitical factors. Operation Sindoor during April–May affected regional connectivity and passenger confidence. An uncertain global economic climate, headwinds arising from US tariff actions on businesses, and the expanding footprint of high-speed rail services such as Vande Bharat collectively altered travel dynamics. For short and medium-haul routes especially, premium rail connectivity has increasingly become a competitive alternative to air travel.

As a result, ICRA was compelled to revise its earlier growth projection for FY26. The agency had initially forecast domestic passenger growth of up to 6 per cent. However, the estimate was later cut sharply to a range of 0–3%.

The financial implications have been significant. Industry losses are estimated to widen to approximately Rs 180 bn in FY26, compared with a net loss of Rs 55 bn in the previous year. Rising cost pressures, subdued demand during key periods, and operational disruptions collectively strained airline balance sheets.

Despite the setbacks, ICRA maintains that the coming financial year could mark a recovery phase for the industry.

Domestic passenger traffic is projected to grow by up to 8% in FY27, aided by what analysts describe as a “low base effect” following the subdued performance in FY26. International passenger traffic, which has remained relatively resilient, is expected to rise from the current growth level of around 9% to approximately 10% next year.

ICRA attributes the improving outlook to several factors, including expanding e-visa and visa-on-arrival coverage, continued government emphasis on developing theme-based tourist destinations, and gradual stabilisation in the operating environment.

If domestic travel improves as projected, industry losses are expected to narrow to around Rs 110 billion in FY27.

“ICRA has maintained a stable outlook for the Indian aviation industry, supported by expectations of modest growth in domestic air passenger traffic and a gradually improving operating environment, despite near-term challenges,” said Kinjal Shah, Senior Vice President and Co-Group Head at ICRA.

However, the recovery is far from guaranteed. Aviation turbine fuel (ATF) prices remain the single most critical variable for airline profitability. Fuel typically accounts for 30–40% of an airline’s operating expenditure.

One of the relatively stabilising factors in recent years has been the moderation in ATF prices. Should this trend reverse sharply, particularly in the event of geopolitical escalation in West Asia, for instance, tensions involving Iran and the United States in the Persian Gulf — fuel costs could spike dramatically, eroding margins and derailing recovery projections.

Additionally, the depreciation of the Indian Rupee continues to exert structural pressure on airline finances. A weaker currency inflates not only fuel import bills but also aircraft lease rentals, maintenance expenses, engine overhaul costs, and debt servicing obligations, most of which are denominated in US dollars.

While currency depreciation in isolation presents challenges, a broader geopolitical crisis affecting oil supply would pose a far greater threat to the sector’s fragile recovery.

The coming financial year may offer Indian aviation an opportunity to stabilise and regain momentum. Yet, the industry remains exposed to external risks from fuel volatility and currency movements to competitive pressures and policy shifts.

After a bruising FY26, the sector’s trajectory now depends on disciplined cost management, steady demand recovery, and a stable global environment. If these variables align, India’s aviation industry could indeed resume its growth story though perhaps with a more cautious and calibrated approach than in previous years.