India’s aviation industry is expected to report net losses of ₹36,000 crore to ₹38,000 crore in the financial year ending March 2027, worsening from estimated losses of ₹28,000 crore to ₹30,000 crore in the previous fiscal year, according to credit rating agency ICRA.

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Higher aviation turbine fuel (ATF) prices, a weaker rupee, rising aircraft lease rentals and slower passenger traffic growth are putting pressure on airline finances. The ongoing conflict in West Asia is adding to these challenges by disrupting international routes and affecting travel demand.

The latest projections point to a difficult year for airlines, with costs rising faster than their ability to increase ticket prices. The situation also highlights how geopolitical tensions, currency movements and aircraft availability can affect the financial health of India's fast-growing aviation sector.

Rising fuel prices put pressure on airline finances

Fuel remains one of the biggest expenses for airlines, accounting for around 30-40% of their operating costs. A sharp increase in ATF prices can therefore have a direct impact on profitability, particularly when airlines cannot raise fares enough to recover the additional expenditure.

According to ICRA, ATF prices for domestic operations rose 46.2% year-on-year in October 2026 and increased 13.2% compared with September. During the first half of FY27, prices were 24.1% higher than in the corresponding period last year.

Airlines have responded by introducing or revising fuel surcharges. IndiGo revised its fuel surcharges on domestic and international bookings from October 6, while Air India, Air India Express and Akasa Air introduced or revised surcharges from October 9.

However, passing on the entire increase in operating costs to passengers remains difficult. Higher fares could discourage price-sensitive travellers, particularly when household budgets are under pressure. Airlines must therefore balance the need to recover costs against the risk of weakening demand.

A weaker rupee adds to operating costs

The depreciation of the Indian rupee against the US dollar is another major concern. Many airline expenses, including aircraft leases, maintenance contracts and certain spare parts, are linked to the dollar.

When the rupee weakens, airlines need to spend more in Indian currency to meet these obligations. The depreciation can also result in foreign exchange losses, further affecting their financial performance.

The impact is particularly significant for airlines operating large leased fleets. Aircraft deliveries continue to add capacity, but they also increase lease-related commitments. When these costs rise alongside fuel prices, airlines face pressure on several fronts at the same time.

This makes cost management more complex. Even if passenger numbers improve, airlines may struggle to improve profitability unless they can control fuel consumption, improve aircraft utilisation and manage their foreign currency exposure.

West Asia conflict disrupts passenger traffic

The conflict in West Asia is expected to weigh on passenger traffic growth in FY27, particularly on international routes affected by airspace restrictions and network disruptions.

Domestic air passenger traffic fell 6.5% year-on-year to 118.2 lakh in September, compared with 126.4 lakh a year earlier. It also declined 2.5% compared with August. For the first half of FY27, domestic passenger traffic decreased 1.9% to 78.61 million.

International traffic carried by Indian airlines experienced a sharper decline, falling 19.3% during the first half of the fiscal year. ICRA expects domestic passenger traffic to grow by 3-6% in FY27, while international traffic for Indian carriers could decline by 3-6%.

These trends suggest that the pressure on airlines is not limited to higher operating expenses. Disruptions to international networks can affect aircraft utilisation, passenger connections and revenue generation. Airlines may also have to deploy aircraft on alternative routes or adjust schedules, adding operational complexity.

For Indian carriers, the challenge will be to maintain reliable services while adapting capacity to changing demand and restrictions on airspace access.

Grounded aircraft add to maintenance and leasing costs

Aircraft availability remains another concern for the industry. ICRA estimates that around 19-20% of the industry's fleet was grounded as of August 2026, amid continuing Pratt & Whitney engine-related issues and capacity disruptions linked to the West Asia conflict.

When aircraft remain grounded, airlines lose the capacity to generate revenue from those aircraft while continuing to bear certain ownership and lease-related costs. They may also need to lease replacement aircraft, including wet-leased capacity, to maintain operations.

Such arrangements can increase expenses, particularly when aircraft are taken on short notice at higher lease rates. Replacing grounded aircraft with older models may also increase fuel consumption, adding to operating costs.

For airlines, this creates a difficult cycle: aircraft shortages can increase leasing and operating expenses, while reduced fleet availability can limit the ability to meet passenger demand efficiently.

The situation also underlines the importance of engine maintenance, spare-parts availability and timely repairs. For the wider maintenance, repair and overhaul (MRO) sector, persistent engine-related groundings reinforce the need for dependable maintenance capacity and supply chains that can reduce the time aircraft spend out of service.

Can airlines recover costs through higher fares?

The central challenge for airlines is that higher costs do not automatically translate into higher revenues. Although fuel surcharges can help recover part of the increase in ATF prices, airlines may have limited room to raise fares further without affecting demand.

This is particularly important in the domestic market, where price sensitivity can influence travel decisions. If airlines raise fares too sharply, some passengers may postpone trips or choose alternative modes of transport. If they absorb too much of the increase, their financial losses could widen.

Airlines will therefore need to manage capacity carefully, prioritise routes with stronger demand and improve operational efficiency. Better fuel management, effective fleet planning and tighter control of leasing and maintenance costs could help limit the impact, although these measures may not fully offset the external pressures.

The balance between fares and demand will be crucial in determining whether airlines can protect revenues while keeping travel affordable.

Negative outlook as risks remains elevated

ICRA has retained a negative outlook for the aviation sector, citing uncertainty around fuel prices, passenger demand and developments in West Asia.

A prolonged conflict or further escalation could put additional pressure on traffic growth, passenger yields and airline profitability. Continued airspace restrictions, currency weakness and inflationary pressures could also make it harder for airlines to recover their costs.

The performance of the sector will depend partly on how demand develops during the festive season, whether fuel prices ease and how quickly international operations stabilise.

India's aviation market retains long-term growth potential, but the current situation shows that passenger growth alone is not enough to ensure financial stability. Airlines must also maintain control over operating costs, improve aircraft availability and build resilience against external shocks.

For the industry, FY27 is shaping up to be a test of both financial discipline and operational resilience. The ability to keep aircraft flying efficiently while managing fuel, currency and maintenance risks will be critical to limiting losses and preparing for a stronger recovery.