India’s aviation industry is expected to remain financially strained through FY2026, with losses projected to widen significantly as rising fuel prices, geopolitical instability and operational disruptions continue to challenge airline profitability. According to ICRA, the sector is likely to report net losses of Rs 170–180 billion in FY2026, reflecting the growing pressure on carriers already battling weak margins.

The ratings agency had earlier projected industry losses to narrow to Rs 110–120 billion in FY2027, supported by traffic growth and improving operational conditions. However, the escalation of conflict in West Asia since late February 2026 has substantially altered that outlook. Higher crude oil prices, depreciation of the rupee against the US dollar and disruptions to international air routes have created fresh cost burdens, prompting Icra to assign a downward bias to its earlier recovery expectations.

Fuel costs remain one of the most critical concerns for Indian airlines. Aviation turbine fuel (ATF), which accounts for nearly 30–40 per cent of airline operating expenses, recorded a sharp 9.2 per cent sequential rise in April 2026 and was 18.2 per cent higher than the previous year. This increase, largely driven by geopolitical uncertainty and elevated global crude prices, has directly weakened airline cost structures and profitability.

Domestic passenger traffic growth has also moderated considerably, reflecting softer demand conditions. In March 2026, domestic air traffic rose just 1 per cent year-on-year to 146.8 lakh passengers, compared with 145.4 lakh in March 2025. For the full FY2026 period, domestic traffic reached 1,677.4 lakh passengers, representing a modest 1.4 per cent annual growth, in line with Icra’s earlier forecast of 0–3 per cent growth but significantly below previous years’ expansion levels.

While traffic improved 4.4 per cent sequentially from February 2026, this was partly due to seasonal demand rather than broad-based recovery. Icra expects domestic passenger growth to improve to 6–8 per cent in FY2027, but warns that rising ticket prices, fuel surcharges of 5–6 per cent and the removal of fare caps in December 2025 could suppress consumer demand.

International operations have shown mixed performance. Indian carriers recorded a 7.7 per cent year-on-year increase in international passenger traffic during the April–February FY2026 period, reaching 33.15 million passengers. However, February 2026 alone saw a marginal 0.3 per cent annual decline and a sharp 16 per cent sequential drop, highlighting the volatility created by global geopolitical tensions and disrupted airspace.

Operational challenges continue to add to industry stress. Supply chain bottlenecks and engine reliability issues particularly Pratt & Whitney engine failures, have grounded around 117 aircraft as of February 2026, accounting for approximately 13–15 per cent of the total fleet. These groundings have forced airlines to lease replacement aircraft at higher costs while also operating older, less fuel-efficient fleets, further increasing expenses.

Additionally, rerouting of international flights due to restricted airspace has increased fuel consumption, airport charges and overall operating costs. Combined with a weaker rupee, which raises dollar-denominated lease and maintenance expenses, airlines are facing mounting financial pressure on multiple fronts.

Despite these headwinds, passenger load factors remained relatively strong at 89.5 per cent in March 2026, indicating that while growth has slowed, demand has not collapsed. Government intervention, including a temporary 25 per cent reduction in landing and parking charges for domestic airlines from April 2026 for three months, may provide some short-term relief but is unlikely to offset broader structural pressures.

Reflecting these worsening industry dynamics, ICRA has revised its outlook for the Indian aviation sector from “stable” to “negative”. The agency noted that the spread between revenue per available seat kilometre (RASK) and cost per available seat kilometre (CASK) is expected to deteriorate further, limiting profitability.

As Indian airlines navigate a combination of volatile fuel prices, currency depreciation, supply chain disruptions and geopolitical uncertainty, the path to financial recovery appears increasingly difficult. While traffic growth may gradually improve, sustained profitability will largely depend on stabilising external conditions and airlines’ ability to manage rising operational costs more effectively.