Indian aviation sector hit by higher ATF prices and slowing passenger growth: Icra

India’s aviation industry is facing renewed financial and operational strain after domestic passenger traffic declined in April 2026, with rising airfares, elevated fuel prices and geopolitical disruptions weakening travel demand, according to a new report by Icra.

The ratings agency retained its “negative” outlook on the sector and warned that escalating costs, airspace disruptions linked to the ongoing West Asia conflict, and persistent supply chain issues could weigh further on airline profitability and passenger growth through FY2027.

The report signals a subdued beginning to the new financial year for Indian carriers, many of which continue to face pressure from grounded aircraft, higher lease expenses and volatile fuel markets.

Passenger traffic records monthly decline

According to Icra, domestic air passenger traffic stood at 140.8 lakh in April 2026, compared with 143.1 lakh passengers during the same period last year.

Traffic also declined sequentially from March 2026 levels, reflecting softer discretionary travel demand amid elevated ticket prices.

Key traffic figures highlighted in the report include:

• Domestic passenger traffic fell 1.6 per cent year-on-year in April 2026
• Traffic declined 2 per cent compared with March 2026
• Icra attributed the slowdown partly to higher fares linked to fuel surcharge increases
• The agency said international and domestic traffic growth forecasts for FY2027 now carry a “downward bias” because of geopolitical uncertainty

Icra noted that flight cancellations linked to restricted airspace availability in parts of West Asia could continue disrupting airline schedules and passenger volumes.

Fuel prices and currency weakness deepen financial pressure

The agency said higher aviation turbine fuel prices remain one of the biggest challenges for Indian airlines, particularly as carriers continue operating in an environment of elevated crude oil prices and rupee depreciation.

According to the report, domestic ATF prices in May 2026 were unchanged from April levels but remained 23.5 per cent higher year-on-year.

Fuel continues to account for a significant portion of airline expenditure.

Icra said:

• ATF contributes roughly 30-40 per cent of airline operating costs
• Around 35-50 per cent of airline expenses are denominated in US dollars
• Major dollar-linked costs include aircraft lease rentals, maintenance and fuel purchases

The agency added that rerouting of long-haul international flights due to regional conflict has increased fuel burn and operational expenditure for airlines operating overseas services.

Additional airport-related charges have also contributed to rising cost pressures.

Grounded aircraft and supply chain disruptions remain unresolved

The report highlighted continuing aircraft availability issues caused by global supply chain bottlenecks and engine reliability problems.

As of March 2026, around 99 aircraft remained grounded across the Indian aviation sector because of supply chain constraints and Pratt & Whitney engine issues, according to Icra.

Those grounded aircraft represented approximately 11-13 per cent of the industry’s fleet capacity.

The agency also pointed to operational disruptions experienced by major airlines over the past year.

According to the report:

• IndiGo, operated by InterGlobe Aviation, faced widespread disruption in December 2025 due to stricter flight duty time limitation norms, adverse weather and technical issues
• Flight cancellations reportedly peaked at around 1,600 services during the disruption period
• Air India temporarily reduced international widebody operations by roughly 15 per cent following additional safety checks introduced after an aircraft crash in June 2025

The combination of grounded aircraft and schedule disruptions has constrained airline capacity even as travel demand remains relatively resilient.

Government steps aim to ease industry stress

The Indian government has introduced several measures aimed at reducing financial pressure on airlines.

Icra noted that the Ministry of Civil Aviation reduced landing and parking charges for domestic carriers by 25 per cent for three months starting April 2026.

In addition, the government approved a Rs 5,000 crore Emergency Credit Line Guarantee Scheme for the aviation sector to support airline liquidity through government-backed guarantees.

State governments have also introduced fuel tax relief measures.

According to the report:

• Maharashtra reduced VAT on ATF to 7 per cent from 18 per cent
• Delhi lowered VAT on ATF to 7 per cent from 25 per cent

These measures are expected to provide some cost relief for airlines operating from major aviation hubs.

Outlook remains cautious despite expected traffic growth

Despite near-term pressures, Icra said domestic passenger traffic in India is still expected to grow by 6-8 per cent in FY2027.

However, the agency warned that sustained fare increases, prolonged geopolitical tensions and continued cost inflation could weaken recovery momentum across the sector.

Icra expects the Indian aviation industry to post a net loss of Rs 170-180 billion in FY2026. Earlier projections had estimated losses would narrow to Rs 110-120 billion in FY2027, although the agency now sees downside risks to those forecasts.

With airlines continuing to navigate elevated operating costs, aircraft shortages and geopolitical uncertainty, the sector’s recovery path is likely to remain uneven over the coming quarters.