India's domestic aviation market is expected to witness moderate growth in the current financial year, with passenger traffic likely to increase by 3-6 per cent, according to the latest report by ratings agency ICRA. International passenger traffic is also expected to grow, although at a slower pace of 0-3 per cent.

Despite the expected increase in air travel, ICRA has retained a negative outlook for the aviation sector. The agency believes that while more people are likely to fly, airlines will continue to struggle with rising operating costs, supply chain disruptions and pressure on profitability.

Passenger demand remains strong

ICRA said demand for air travel in India continues to remain healthy, supported by economic growth, rising business activity and increasing passenger mobility. More Indians are choosing air travel for business, tourism and personal travel, which is expected to support passenger growth during FY27.

The projected growth also marks an improvement from FY26, when domestic passenger traffic increased by only 1.4 per cent, reaching around 167.7 million passengers. Although the latest forecast indicates a recovery, growth is still expected to remain below the pace seen before recent global disruptions.

Higher costs continue to affect airlines

While passenger numbers are expected to rise, airlines are facing a difficult financial environment. ICRA pointed out that carriers continue to deal with high aircraft lease rentals, increased maintenance expenses and elevated Aviation Turbine Fuel (ATF) prices. In addition, the weakening of the Indian rupee against the US dollar has further increased operating costs because many airline expenses, including aircraft leasing and maintenance contracts, are paid in foreign currency.

These cost pressures are making it difficult for airlines to improve profitability even as passenger demand remains steady.

Supply Chain problems

One of the biggest challenges for Indian airlines continues to be the shortage of available aircraft.

Global supply chain disruptions and delays in engine maintenance and inspections have affected aircraft availability, preventing airlines from expanding their fleets as quickly as planned. Several aircraft remain grounded due to engine-related issues, limiting capacity and reducing airlines' ability to add new routes or increase flight frequencies.

According to ICRA, these operational challenges are likely to continue impacting airline earnings during the current financial year.

West Asia conflict

The report also highlighted the impact of the ongoing geopolitical tensions in West Asia. The conflict has resulted in higher fuel prices, airspace restrictions and flight disruptions, forcing airlines to take longer routes on several international sectors. Longer flying times increase fuel consumption and operating costs, while higher airfares could discourage discretionary travel.

ICRA cautioned that if the conflict continues or worsens, it could further affect passenger traffic growth, airline yields and overall profitability.

Several airlines have already reduced or adjusted their international flight schedules because of airspace closures and operational challenges.

Industry losses to increase

According to ICRA, the financial performance of Indian airlines is likely to remain under pressure in FY27.

The agency estimates that the aviation industry could report a net loss of ₹36,000-38,000 crore during the financial year, compared with an estimated ₹32,000-34,000 crore loss in FY26.

The increase in losses is expected to be driven by a combination of higher fuel costs, rising aircraft lease rentals and the continued depreciation of the rupee against the US dollar.

Fuel prices remain high

Although Aviation Turbine Fuel (ATF) prices remained unchanged in July compared to June, fuel costs continue to remain significantly higher than last year.

ICRA noted that domestic ATF prices have remained unchanged since April 2026 because oil marketing companies have not revised prices during this period. However, domestic ATF prices are still around 18 per cent higher than a year ago, keeping pressure on airline operating expenses. Fuel remains one of the largest cost components for airlines, making profitability highly sensitive to changes in crude oil prices and global geopolitical developments.

Capacity and efficiency to decide recovery

ICRA believes that the aviation industry's long-term growth story remains intact because of India's expanding economy and increasing demand for air travel. However, the agency says airlines will need to improve operational efficiency while gradually adding more aircraft to their fleets to restore profitability.

A sustained recovery will depend not only on stronger passenger demand but also on improvements in aircraft availability, easing supply chain bottlenecks and stable fuel prices. The report suggests that unless these challenges begin to ease, airlines may continue to face financial pressure even as more passengers take to the skies.

Continuing challenges

India's aviation sector continues to be one of the fastest-growing in the world, supported by rising incomes, expanding regional connectivity and increasing demand for air travel. However, the latest ICRA report underlines an important reality: strong passenger growth alone is no longer enough to ensure healthy airline finances.

For airlines, the focus in FY27 will be on balancing growth with cost control, improving fleet utilisation and navigating an uncertain global operating environment. Until supply chain constraints ease and operating costs become more stable, profitability is likely to remain one of the industry's biggest challenges.