Every day, millions of Indians board flights. Airports are expanding at record speed, airlines are ordering hundreds of new aircraft, and India is widely expected to become one of the world's largest aviation markets.

Yet the airline business continues to produce an astonishing paradox, even as more people fly than ever before, making money from aviation remains incredibly difficult.

Air India's record loss of more than $2.8 billion in FY2025-26 is only the latest reminder of a problem that has haunted airlines for decades. The Tata Group-owned carrier has spent years trying to reinvent itself, but rising fuel prices, Pakistan's airspace restrictions, supply-chain disruptions, geopolitical tensions in West Asia and operational challenges have pushed its turnaround further out of reach.

Air India Express has faced similar pressures. Despite growing revenue, the low-cost airline recently raised its borrowing limit to ₹17,500 crore as losses widened, highlighting how even expanding passenger demand cannot always offset rising costs.

India's aviation industry has repeatedly watched major airlines stumble despite strong consumer demand. Kingfisher Airlines collapsed under mounting debt. Jet Airways, once the country's largest private airline, suspended operations after years of financial distress. Go First eventually ceased flying after filing for insolvency, while SpiceJet has spent years navigating financial and legal turbulence.

The obvious question is: Why does this keep happening?

India may be one of aviation's fastest-growing markets, but airlines operate on some of the thinnest profit margins in any industry. Aircraft cost hundreds of crores. Airport charges, engineering, maintenance, staff salaries, insurance and financing must all be paid regardless of how many passengers eventually board a flight.

Yet once a flight is scheduled, selling one additional seat costs comparatively little. That simple fact creates one of aviation's biggest problems.

Whenever airlines have empty seats, they're often willing to slash fares to fill them because earning something is better than flying with vacant capacity. Competitors respond with lower prices of their own, triggering fare wars that quickly erode profits across the industry.

For years, analysts believed the answer was simple, legacy airlines were inefficient, while low-cost carriers had discovered the winning formula. For a while, that seemed true.

IndiGo built a profitable business through disciplined cost control and operational efficiency. Around the world, airlines like Ryanair appeared to prove that low-cost aviation could consistently make money. But that explanation has become less convincing over time.

Air India continues to struggle despite massive investment. Air India Express has reported widening losses. Globally, even successful low-cost airlines have faced increasing financial pressure following the pandemic, rising fuel costs and geopolitical disruptions.

To be profitable, the airline industry has to be uncompetitive

Perhaps the problem isn't management. It is the industry itself.

Economists have spent decades trying to explain this, and one of the most fascinating explanations comes from University of Chicago economist Lester Telser. His theory describes airlines as belonging to what economists call an "empty core", a rare type of market where stable, profitable competition is inherently difficult.

Unlike most industries, airlines combine enormous fixed costs with products that are largely interchangeable. Whether a passenger flies between Delhi and Mumbai on one airline or another, the experience is often similar enough that ticket price becomes the deciding factor.

When demand rises, airlines expand and new competitors enter attractive routes. Eventually, too many seats chase too few passengers and prices falls and profits disappear.

Some airlines fail or merge. The surviving carriers regain pricing power. Then the entire cycle begins again. In other words, aviation doesn't struggle because there's too little competition. It struggles because there's often too much.

This also explains why every external shock hits airlines so hard. Whether it's the pandemic, rising crude oil prices, Pakistan's airspace closure, conflict in the Middle East or supply-chain disruptions delaying aircraft deliveries, airlines have little room to absorb sudden increases in costs or sharp drops in demand.

For passengers, cheaper fares often feel like good news. For airlines, they can be the beginning of another financial crisis.

As India continues its aviation boom, more people will almost certainly take to the skies. But Air India's latest losses serve as a reminder that carrying more passengers has never guaranteed healthy profits.

That remains one of modern capitalism's strangest paradoxes: an industry essential to economic growth that still struggles to make money almost by design.