India’s aviation sector is expanding fast, but one big challenge remains: the high and unpredictable cost of aviation turbine fuel (ATF), which depends on both taxes and global oil prices.
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India’s aviation sector is expanding fast, but one big challenge remains: the high and unpredictable cost of aviation turbine fuel (ATF), which depends on both taxes and global oil prices.
Even as more people fly and airlines order new planes, fuel prices remain the main factor that determines whether airlines succeed or fail.
For Indian airlines, fuel is not just another expense. It is their highest cost.
ATF accounts for nearly 40% of total operating costs for Indian airlines, according to estimates from Business Standard and ET TravelWorld. In most other countries, it is usually only about 20 to 25%.
This difference is not accidental. It is built into the system.
Unlike most sectors, ATF in India is not covered by the Goods and Services Tax (GST), so airlines cannot claim input tax credits. Instead, fuel is taxed with a mix of central excise duty and state-level VAT, which can be as high as 25 to 30% in some areas.
Because of this, Indian airlines always face higher costs than their global peers, even before changes in crude oil prices are considered.
The weakness of this system becomes most clear during global disruptions.
In early March 2026, rising geopolitical tensions in West Asia disrupted key air corridors and pushed crude oil prices sharply higher. According to market reports cited by Business Today, Brent crude rose from around $72 per barrel to over $110 within weeks.
Airlines felt the impact right away. ATF prices shot up, and since taxes are charged as a percentage, the tax amount also increased, making the cost jump even bigger.
Air India responded by introducing phased fuel surcharges across its network from March 2026. The airline said the move was necessary to maintain route viability amid rising fuel costs. Industry analysts say these surcharges are often the first clear sign that airlines are under financial stress.
Industry executives call this problem a “cascading tax structure.” When fuel prices rise globally:
This double impact is especially strong in India.
According to the Economic Survey cited in industry analyses, ATF prices in India have historically been significantly higher than in markets such as Southeast Asia and the Middle East, largely due to taxation.
This means airlines in India face both global oil price swings and local tax policies that make those swings even bigger.
The financial effects are clear and serious.
According to HSBC estimates cited in market reports, every $1 increase in jet fuel prices can add hundreds of crores to an airline’s annual fuel bill. For large carriers, even small fluctuations can materially affect profitability.
This is especially tough in India, where passengers are sensitive to price changes and airlines can’t easily pass on higher costs. This leads to a constant financial squeeze:
Over time, this situation has made the industry financially unstable.
India’s aviation history includes several airline failures, such as Kingfisher Airlines, Jet Airways’ long grounding, and the recent bankruptcy of Go First. While individual cases differ, analysts have consistently pointed to structural cost pressures, especially fuel pricing, as a key underlying factor.
High ATF costs, tough competition, currency swings, and expensive airport fees make it hard for airlines to stay profitable.
As one industry commentary put it, the problem isn’t just mistakes by airlines, but a system that gives them little room for error.
The industry’s most persistent demand has been to bring ATF under GST. This change would let airlines claim input tax credits, lower their fuel costs, and bring India in line with global standards.
The Ministry of Civil Aviation has supported this idea before, but there hasn’t been much progress.
The primary obstacle lies with state governments, which derive significant revenue from VAT on ATF. According to Business Today, discussions in recent GST Council meetings have not resulted in consensus, with states reluctant to forgo this income stream.
This has led to a policy deadlock:
For now, nothing has changed.
India’s aviation tax system is very different from other major markets. In regions such as the Gulf and Southeast Asia, governments typically treat aviation as a strategic sector, with:
This helps airlines keep costs down and makes them more financially stable. In contrast, Indian airlines face high taxes and costs, even though they serve one of the world’s fastest-growing passenger markets.
Even with these challenges, demand keeps growing.
According to Reuters, India is now the third-largest domestic aviation market globally, with airports handling more than five lakh passengers daily.
Low-cost airlines have made flying more accessible, and programs like UDAN have improved regional connections.
This creates a puzzling situation.
India has:
But the industry also faces built-in cost pressures that make it hard to stay profitable.
The debate about ATF prices really comes down to a bigger question: Should aviation be seen mainly as a way to raise revenue, or as a driver of growth?
If the focus stays on taxes, airlines may keep struggling with low margins and financial stress. If policies shift to lower costs, the industry could become more efficient and sustainable.
In the short term, airlines will probably keep using fuel surcharges and dynamic pricing to handle price swings.
In the longer term, more fundamental changes may be required:
Until then, ATF prices will keep being the main factor shaping Indian aviation’s economics. As India’s aviation market grows, the real question isn’t about demand anymore, but whether the industry’s cost structure can support it.
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