Indian Aviation Sector Faces Negative Outlook Amid Rising Costs and West Asia Instability

Domestic air passenger traffic is expected to grow by 3-6 per cent and international by 0-3 per cent for Indian carriers in the current fiscal, ratings agency ICRA said on Thursday while assigning a negative outlook on the Indian aviation industry.

These forecasts reflect the impact of the instability in West Asia, which has resulted in a hike in fares due to cost escalations for the airlines and the anticipated curtailment of discretionary spends because of increased inflation, ICRA said.

It also said that any prolonged continuation or further escalation of the West Asian conflict could result in higher downside risks to traffic growth, yields and profitability, owing to potential persistence of elevated fuel prices, airspace restrictions and inflationary pressures.

At the same time, the ratings agency said the industry is expected to report a net loss of Rs 36,000- 38,000 crore in the current financial year on account of increased costs due to depreciation of the Indian Rupee against the US Dollar, high ATF prices and an anticipated rise in lease rentals owing to continued aircraft deliveries against an estimated net loss of Rs 32,000-34,000-crore in FY26.

The Negative Outlook, ICRA said, reflects the expected weakening of the revenue per available seat kilometre - cost per available seat kilometre (RASK-CASK) spread due to hardening of jet fuel prices and disruptions in the availability of certain international airspaces starting February 28, 2026, following escalation of the conflict in West Asia, coupled with continued depreciation of the Indian Rupee against the US Dollar.

Further, flight cancellations amid airspace closures have impacted international air travel demand, with some of the carriers having already announced curtailment of international flights in the coming few months, it said.

The onset of the hostilities in West Asia since end-February 2026 is expected to result in subdued air passenger traffic growth in FY2027, it said.

Jet fuel or Aviation Turbine Fuel (ATF) prices in July remained unchanged for both domestic and international routes on a sequential basis, with the prices announced on July 1 kept unchanged for both domestic and international routes vis-A -vis June 2026 prices, ICRA said.

The ATF prices for domestic routes have been kept unchanged since April 2026, in the absence of any price revisions by oil marketing companies (OMCs) during the period, according to the ratings agency.

However, the prices for domestic routes in July are still higher by 18 per cent on a year-on-year basis while for international operations, the ATF prices in the current month remained unchanged on a sequential basis, it said.

Noting that while domestic ATF price rises have been moderated through government intervention, fuel remains a dominant cost, accounting for 30-40 per cent of airline operating expenses.

Further, with 35-50 per cent of airline costs being dollar-denominated, including fuel, aircraft lease rentals and maintenance expenses, sustained high crude prices and a weak rupee continue to pose risks, it said.

Also, some airlines have foreign currency debt, it said and added that although domestic airlines benefit from a partial natural hedge through earnings from international operations, they have net payables in foreign currency.

The yield movement, thus, remains monitorable in the current situation of escalating costs, it said.

To support the industry amid elevated cost pressures, the Civil Aviation Ministry had announced a 25 per cent reduction in landing and parking charges for domestic airlines at major airports for a three-month period beginning April.

However, with the temporary relief measure having lapsed, domestic carriers are once again required to bear the full charges, it said.

The Government's approval of the ATF price stabilisation fund, announced on June 3 is another intervention for cushioning airlines from this extreme fuel price volatility, ICRA said.

The scheme provides a one-time budgetary support, not exceeding Rs. 10,000 crore, to OMCs through interest-free advances, enabling them to offer more stable and predictable ATF pricing to scheduled Indian airlines for a 36-month period (with provision for annual review).

By effectively smoothing out sharp fluctuations in international fuel prices, the mechanism creates a buffer for airlines and reduces their exposure to sudden cost spikes amid the West Asian crisis, the ratings agency said.

The stabilisation fund is expected to improve cost visibility for airlines, particularly during a phase when profitability remains under pressure due to high fuel costs and competitive intensity. It will reduce the pass-through of fuel price shocks to passengers, thereby helping to moderate fare volatility, thus, assisting in sustaining passenger demand, it said.