Aviation Turbine Fuel (ATF) prices in India skyrocketed from approximately ₹60.5 per litre in March 2026 to nearly ₹142 per litre by May—a staggering 135% increase driven by the West Asia crisis. For airlines like IndiGo and Air India, this surge is catastrophic because fuel typically constitutes 35-40% of operating costs in India, significantly higher than the global average of 25-30%. When ATF costs spike to 55-60% of total expenses during such crises, profitability evaporates. IndiGo reported a net loss of ₹2,536 crore for Q4 FY26, while Air India’s losses exceeded ₹26,700 crore for the full fiscal year. Both carriers responded by slashing capacity: Air India cut domestic flights by up to 22% and international operations by 27%, while IndiGo reduced domestic capacity by 5-7% and international capacity by 17%.
The Union Cabinet approved a ₹10,000 crore ATF Price Stabilisation Fund to cushion this blow. The mechanism provides interest-free advances to state-owned Oil Marketing Companies (OMCs)—Indian Oil, BPCL, and HPCL—to compensate for losses when global ATF prices exceed a government benchmark. Under this scheme, a fixed ATF price arrangement has been established: ₹86.32 per litre (FOB) for domestic operations and ₹104.49 per litre for international operations. After adding airport charges, taxes, and OMC margins, the effective selling price becomes approximately ₹115 per litre in Delhi. This represents a significant discount compared to the market peak of ₹142 per litre. The fund operates as a revolving mechanism: when international prices moderate, OMCs must recover the differential amount and return it to the Consolidated Fund of India.
The fixed-price regime offers substantial margin protection. With fuel costs reduced from ₹142 to ₹115 per litre—a roughly 19% decline—and fuel constituting 40% of operating costs, airlines could see an overall operating margin improvement of approximately 7.6%. However, IndiGo and Air India are unlikely to pass these savings to passengers through lower fares. The primary reason is financial recovery. Both carriers have accumulated massive losses and face significant debt obligations. Retaining fuel cost savings is essential for balance sheet repair, deleveraging, and funding critical investments in fleet modernization and network expansion. Additionally, the competitive landscape allows this strategy: IndiGo and Air India control over 80% of the domestic market, reducing pressure to engage in price wars. Furthermore, with geopolitical uncertainty persisting, airlines view these savings as a necessary buffer against future volatility rather than a temporary windfall to be shared with consumers.
Airlines face a difficult trade-off between raising fares and suspending routes. Fare hikes can reduce demand, particularly among price-sensitive travelers, and may invite regulatory scrutiny. Route suspensions, while immediately reducing costs, lead to permanent market share erosion and network inefficiencies. Both carriers have adopted a hybrid approach: selective route rationalization rather than complete withdrawals, combined with targeted fuel surcharges. For instance, Air India increased international fuel surcharges from ₹399 to up to ₹899, stating that even this increase did not fully compensate for the exponential rise in jet fuel costs. This strategy aims to preserve network connectivity while maximizing revenue on viable routes.
For OMCs, the ATF under-recoveries of ₹30 per litre compound existing financial stress. State-owned OMCs were already facing estimated under-recoveries of nearly ₹30,000 crore monthly across all petroleum products due to the West Asia crisis. The ATF under-recoveries exacerbate working capital pressure, as evidenced by negative working capital positions across all three OMCs: Indian Oil (-₹72,971 crore), BPCL (-₹17,840 crore), and HPCL (-₹38,573 crore) in FY25. The ₹10,000 crore interest-free advance provides immediate balance sheet relief by eliminating interest expenses and improving liquidity. However, the recovery mechanism creates long-term obligations. OMCs must eventually repay the differential when prices moderate, introducing cash flow volatility that requires sophisticated working capital management. The compensation process involves claim verification by a Monitoring Committee, creating potential timing mismatches between ATF sales revenue and compensation receipt.
The ATF Price Stabilisation Fund highlights a fundamental contradiction in India’s aviation fuel market. While the pricing framework is technically deregulated and linked to international benchmarks, the government’s intervention through price caps, fixed-price regimes, and financial support amounts to de facto control. This creates moral hazard, as airlines may expect government bailouts during future crises. The fiscal implications are significant: if ATF prices remain elevated and the fund cannot be fully recovered, the government faces a direct hit to its fiscal deficit. The opportunity cost of ₹10,000 crore at government borrowing rates represents approximately ₹700 crore annually. Additionally, state VAT reductions—Delhi cut VAT from 25% to 7% and Maharashtra from 18% to 7%—represent revenue foregone of approximately ₹985 crore and ₹550-600 crore annually, respectively.
ATF remains outside the Goods and Services Tax regime, forcing airlines to bear a cascading tax burden. Under the current system, airlines pay central excise duty (approximately 11%) and state VAT (ranging from 1% to 33%) on fuel, but cannot claim Input Tax Credit. This creates a “tax on tax” effect. For example, if an airline pays ₹18 in fuel taxes and collects ₹50 in GST on tickets, the total tax burden is ₹68. If ATF were under GST, the airline could deduct the ₹18 fuel credit from its output tax liability, reducing the total tax burden to ₹32. This distortion places Indian airlines at a competitive disadvantage compared to sectors with full ITC availability and international carriers operating from tax-advantaged hubs. State governments have resisted bringing ATF under GST because petroleum products fall under the State List, and high-VAT states like Delhi (where ATF VAT contributes 19% of total VAT collections) are reluctant to cede this revenue source to the GST Council.
The recent crisis has exposed Indian carriers’ vulnerability to fuel price volatility. International carriers like Wizz Air, which had hedged 83% of its fuel needs through March 2026 at $681-$749 per metric tonne, had meaningful buffers against the price spike. In contrast, Indian carriers absorbed most of the increase directly, reflecting what analysts described as a “lack of preparation”. Implementing fuel hedging programs similar to Southwest Airlines’ model—which saved the company an estimated $3.5 billion—could provide protection. However, the upfront costs are substantial: annual premiums could reach ₹1,200-1,800 crore for IndiGo, plus collateral requirements of ₹800-1,200 crore. Given recent losses, these opportunity costs are significant. Structural barriers also exist, including regulatory approvals for overseas hedging instruments and capital constraints for posting collateral.
Direct ATF import liberalization, permitted since 2012, has failed to gain traction due to infrastructure barriers. SpiceJet’s pilot project in Kochi—aiming to import 15% of fuel requirements—was shelved due to logistical challenges. The primary obstacle is the lack of common user fuel infrastructure at airports. While Rajiv Gandhi International Airport in Hyderabad has implemented an “Open Access Model” allowing any authorized oil company to supply fuel, such models are rare. The Airports Authority of India has proposed a Special Purpose Vehicle to develop common infrastructure, but progress has been slow. Without coastal storage tanks, pipeline connectivity to airports, and common user facilities, direct imports remain economically unviable for most airlines.
The ATF Price Stabilisation Fund provides critical short-term relief but does not address structural problems. The divergence between de jure deregulation and de facto government control creates market distortions, while the exclusion of ATF from GST perpetuates a cascading tax burden. Fuel hedging and direct import liberalization offer potential long-term solutions but face significant financial and infrastructure barriers. True reform requires addressing these structural challenges to build a more resilient and competitive aviation sector.
