India's domestic aviation sector is experiencing significant headwinds as passenger traffic growth slowed to just 1% year-on-year in March 2026, with 146.8 lakh passengers compared to 145.4 lakh in the previous year. According to ICRA, this modest growth has brought the full financial year 2025-26 domestic passenger traffic to 1,677.4 lakh, registering a 1.4% growth - in line with the agency's earlier estimates of 0-3%. The sequential growth shows 4.4% increase in March despite airlines' capacity deployment remaining 3% lower than March 2025, though it was 10.6% higher compared to February 2026. As reported by Upstox, ICRA has maintained a 'negative' outlook on the Indian aviation industry, citing pressure on profitability from rising aviation turbine fuel (ATF) prices and other operational challenges.
The aviation fuel crisis has intensified significantly with ATF prices rising 9.2% in April from the previous month and up 18.2% year-on-year, driven by higher crude oil prices following regional conflicts. As reported by Upstox, fuel costs now account for 30-40% of airlines' operating expenses, making the sector highly sensitive to price fluctuations and currency movements. The Federation of Indian Airlines (FIA) had previously warned that any ad hoc pricing and irrational increase in ATF prices will result in insurmountable losses for airlines. The West Asia crisis has caused airspace restrictions and increased oil prices, further contributing to the operational cost surge. The government has provided some relief by reducing landing and parking charges by 25% for three months starting April 2026, though this falls short of the industry's demands for comprehensive fuel cost relief.
International aviation operations are facing even more severe challenges, with passenger traffic for Indian carriers falling 0.3% year-on-year in February and declining 16% sequentially to 2.85 million. However, for the April-February period, international traffic rose 7.7% to 33.15 million, according to ICRA. The agency warns that the industry's projected net loss for FY2027, earlier estimated at ₹110-120 billion, could worsen due to rising costs and operational challenges stemming from the West Asia conflict. The sector continues to grapple with supply chain challenges and engine issues, particularly involving Pratt & Whitney engines, which led to the grounding of about 117 aircraft as of February 2026, or 13-15% of the total fleet.
The aviation sector's financial challenges are mounting significantly, with Indian carriers already expected to report net losses of ₹170-180 billion in FY2026, hit by slower traffic growth, currency losses and disruptions. As reported by ICRA, the agency's earlier forecasts for FY2027 - 6-8% domestic growth and 8-10% international growth - now carry a 'downward bias' due to flight cancellations, rerouting and higher fares. The revenue per available seat kilometre-cost per available seat kilometre (RASK-CASK) spread is expected to weaken due to hardening ATF prices, geopolitical tensions impacting international airspace availability, and rupee depreciation against the US dollar. The FIA has specifically requested temporary deferment of excise duty on ATF, which is at 11%, stating that the current situation is creating a severe imbalance in domestic and international operations.
According to the FIA's analysis reported by The Times of India, Delhi has the second highest VAT at 25%, while Tamil Nadu leads at 29%. Major aviation hubs including Mumbai, Bangalore, Hyderabad, and Kolkata maintain rates between 16% and 20%. These six cities collectively cover over 50% of airline operations within India, making the tax structure particularly impactful for the aviation sector. The airlines have highlighted that with the abnormal increase in ATF prices from the pre-crisis period, adding rupee depreciation to the increased prices, the 11 per cent excise duty also increases manifold for the airlines.
