Is There More Trouble In The Skies For Indian Airlines?

This summer is becoming torrid for the aviation sector. In the US, low-cost carrier Spirit has shut operations after 34 years in service. The reason? Rising jet fuel prices were triggered by the West Asia conflict. Alarm bells are ringing back home, too. The Federation of Indian Airlines has written to the government about operations becoming unsustainable and the need for relief measures.

A multitude of things seem to be going wrong for the sector. One is rising jet fuel prices. Domestic carriers have also been hit by the rising US dollar against the rupee. Closure of airspace over West Asia and Pakistan is forcing Indian carriers to take a longer route to go west. Adding fuel to the fire is Prime Minister Narendra Modi’s appeal to citizens to reduce international travel.

And the country is echoing this sentiment. Chairman of RPG Enterprises, Harsh Goenka, took to the microblogging website X to announce strict optimisation of travel. “Foreign travel is to be curtailed to the absolute minimum,” his post read.

The Delhi government has taken a similar step. Chief Minister Rekha Gupta has announced that no minister or official of the Delhi government will undertake foreign travel for the next year.

The Impact

To maintain operations as smoothly as possible, domestic carriers are reworking their strategies. They have reduced their summer schedule by around 10%. Air India recently reduced international operations by 25%, or 1,200 flights, impacting 33 routes in four regions. IndiGo—which has a fleet size of 440 of which 80% is leased—has reportedly cut 12% flights, while SpiceJet is facing its toughest times with unpaid staff dues of over 2.5 months. The small carrier’s entire international operation has been impacted. Several of its domestic flights had to be cancelled due to the end of aircraft lease, bringing down its fleet size from 35 to 21 over the past few weeks.

However, if the war continues, the spillover could be visible in the second quarter of the FY27 too, according to analysts.

Kinjal Shah, Senior Vice President & Co-Group Head, Corporate Ratings, ICRA Ltd, says losses are expected to persist amid an adverse cost environment shaped by geopolitical developments.

For FY27, ICRA had projected that net losses will narrow to Rs 11,000-12,000 crore from Rs 17,000-18,000 crore in FY26, supported by growth in passenger traffic. However, the West Asia conflict, resulting in flight cancellations, rerouting for select long-haul international routes, increase in fuel burn, higher costs owing to additional airport charges as more aircraft remain grounded, increase in fuel cost, and depreciation of the rupee against the dollar pose a downward bias to the forecast.

Turbulent Weather

The closure of the Gulf airspace since the end of February has posed a big challenge. The Gulf market is a key contributor to India’s aviation sector, accounting for nearly half the international passenger traffic to and from India, according to DGCA.

Notably, international passenger traffic witnessed a sharp contraction of 36% on a YoY basis and 35% on a sequential basis in March 2026.

Speaking at a town hall on May 8, Air India Chief Executive Officer and Managing Director (CMD) Campbell Wilson told employees to maintain a “relentless focus on costs” amid airspace closures, depreciation of the rupee, and 2.5-3 times increase in jet fuel prices compared to earlier levels.

The sombre mood is reflected in the airline’s headquarters in Gurugram. The management has deferred annual salary increments by at least one quarter.

Air India’s losses more than doubled to Rs 26,000 crore in FY26 over the consolidated loss of Rs 10,859 crore in FY25, as per Singapore Airlines, which holds a 25.1% stake in the airline.

“A key driver of this pressure has been ATF prices, which rose 18.2% year-on-year and 9.2% sequentially in April, following the escalation of tensions in West Asia. Though ATF prices announced on May 1, 2026, were kept unchanged for domestic routes and increased moderately by 5.3% for international operations, high crude oil prices and a weak rupee continue to pose downside risks to the cost structure,” says Shah.

The impact of the dollar on airlines is significant as 35-50% of airlines’ operating expenses—including aircraft lease payments, fuel expenses, and a significant portion of aircraft and engine maintenance expenses—are denominated in dollars. A rupee fall increases costs.

Further, some airlines have foreign currency debt. While domestic airlines also have a partial natural hedge to the extent of earnings from international operations, overall, they have net payables in foreign currency. This natural hedge has taken a hit with international operations disrupted badly due to the war. Airlines operators should watch out for this headwind.

Feeling the pinch

Are consumers feeling the pinch? While on the domestic front, airfares have risen by 10-15%, international passengers have seen a hike of almost 40%; these are expected to rise further owing to capacity constraints.

“Someone’s loss is someone else’s gain,” goes the age-old adage. And that seems to the case here too. As Indian domestic carriers’ international footprint shrinks, foreign carriers are gaining space. According to data by OAG, the share of foreign airlines’ India-origin international schedule rose to 58.4% in March-May this year, up from 51.2% during the same period in 2025.

Lufthansa-owned Swiss Air’s India departures rose 39% in March-May from last year. Amsterdam-based KLM’s Indian departures rose 19.5%.

Hong Kong-based Cathay Pacific increased its flight schedule by 19%.

In the international sector to and from India, foreign airlines have increased the capacity to occupy the void left by the West Asia carriers too. Indian carriers are on the receiving end as Pakistan airspace is open to foreign carriers, which means shorter flying time.  

Analysts concur. Gagan Dixit, researcher of aviation, chemicals, oil & gas sectors at Elara Securities, says reduction in operations by Air India is expected to consolidate IndiGo’s market even more.

“IndiGo’s nearly 50% international departures were linked to the Middle East. So, there is a sudden impact. But, they have routed most of the international capacity to the domestic market or other destinations in Asia. So, this 50% might actually be less than 20%,” says Dixit. He says higher ATF prices have been partly taken care of by an increase in airfares.

“On the domestic side, there is no ATF hike, but airfares have increased. Domestic airfares, which have jumped by 13-15% in the past two months, will remain high for the whole of 2026 if the war continues,” he says.

Dixit adds that the summer schedule has been cut, and this is the first time after Covid that the capacity is declining.

Before the start of the summer schedule, the Ministry of Civil Aviation (MoCA) had lifted the airfare cap that was in place after the IndiGo December 2025 operational meltdown. High fares have tapered demand.

Fuel used to account for 30–40% of operating expenses before the Gulf conflict. This has now risen to 55-60%. Also, subdued passenger demand growth is affecting profitability.

Domestic traffic grew only around 1.2% in FY26 and declined by around 1.2% YoY in March 2026, while international traffic growth was modest at around 3.9% for the year, according to ICRA.

Reparative Measures

Tough times call for tough measures. Domestic airlines are on the road to austerity by postponing increments, cutting costs, and eliminating wastage and leakage. The government has also stepped in to reduce pressure on domestic carriers. It has rolled out a Rs 5,000 crore emergency credit line for domestic carriers, allowing them to borrow Rs 1,500 crore each with a seven-year tenor and two-year moratorium. Other measures include capping ATF prices on the domestic sector and 25% reduction in parking fees at airports.

Last month, in an appeal to the to the Ministry of Civil Aviation (MoCA), the Federation of Indian Airlines—a grouping of Air India, IndiGo, and SpiceJet—flagged the current ad hoc pricing mechanism for ATF, which is creating a severe imbalance in domestic and international operations and rendering airline networks unviable and unsustainable.

It demanded that the jet fuel formula be reversed to one with margin bands—with a floor and a ceiling—for what refiners can charge and have the same pricing for domestic as well as international flights of Indian airlines. There was a moderate 5.3% increase in international ATF prices in May.  

To support the industry, in April 2026, the MoCA announced a reduction in landing and parking charges for domestic airlines by 25% for three months starting April 2026. There has been a cap on domestic jet fuel prices to ensure that domestic airfares remain sustainable. Dixit says the credit support is a lifeline for the smaller carriers.

ICRA notes that these measures offer partial mitigation against structurally high fuel costs, currency pressures, and disruption related expenses.

A prolonged war could damage the industry growth and act as a death knell for smaller domestic players, leading to further consolidation of aviation market in the country. With the prime minister’s alarm bell ringing through the already ailing economy and with other industries echoing that caution, it is only expected that the turbulence will remain, at least in the short term. Airlines operators better fasten their seat belts!

 

@richajourno