India’s aviation industry is expected to post sharply higher losses in FY2026 despite a recovery in passenger traffic, as operational disruptions, currency weakness and rising aircraft inductions weigh on profitability, according to a February report by Icra.
The ratings agency forecasts the industry will report a net loss of Rs 170-180 billion in FY2026, widening from a net loss of Rs 56 billion in FY2025. The revised estimate is significantly higher than its earlier projection of Rs 95-105 billion in losses for the current fiscal year.
The deterioration is driven primarily by elevated losses at InterGlobe Aviation, which operates IndiGo, following large-scale flight cancellations and passenger refunds during operational disruptions in early December 2025, the report said. A weakening rupee against the US dollar in the second and third quarters of FY2026 also resulted in sizeable foreign exchange losses, although a large proportion of these remain unrealised.
Icra maintained a stable outlook on the sector, citing expectations that the recent disruptions are temporary and that demand fundamentals remain intact.
Domestic air passenger traffic rose 5.6 per cent year-on-year in January 2026 to 154.4 lakh passengers, compared with 146.1 lakh a year earlier. On a sequential basis, traffic increased 7.9 per cent from December 2025, signalling a recovery after IndiGo’s disruptions. For the first 10 months of FY2026, domestic traffic stood at 1,391.8 lakh passengers, reflecting a modest 1.7 per cent annual growth.
Capacity deployment in January was marginally lower by 0.2 per cent year-on-year at around 98,108 departures, though it rose 5.1 per cent month-on-month. Passenger load factor improved sharply to an estimated 94.5 per cent in January 2026, compared with 89.2 per cent a year earlier.
Despite the improvement in load factors and healthy yields, Icra expects domestic traffic growth for FY2026 at just 0-3 per cent, reaching 165-170 million passengers. The forecast was revised down from an earlier 4-6 per cent growth estimate, reflecting cross-border tensions earlier in the year, the impact of an aircraft accident in June 2025, business travel headwinds linked to US tariffs and the December disruptions at IndiGo.
International traffic growth for Indian carriers has also been trimmed. Icra now expects 7-9 per cent growth in FY2026, down from its earlier projection of 13-15 per cent.
Fuel prices have provided some relief. Aviation turbine fuel prices declined 4.1 per cent year-on-year and 1.0 per cent sequentially in February 2026. Average ATF prices stood at Rs 95,181 per kilolitre in FY2025, down 8 per cent year-on-year, and were 4.2 per cent lower year-on-year during April 2025 to February 2026.
However, fuel continues to account for 30-40 per cent of airlines’ operating expenses. Moreover, 35-50 per cent of total operating costs, including fuel, lease rentals and a substantial portion of maintenance expenses, are denominated in dollars. Although airlines benefit partially from foreign currency earnings on international routes, most still have net foreign currency payables, exposing them to exchange rate volatility.
Supply chain challenges and engine-related issues have further constrained capacity. Aircraft powered by Pratt & Whitney engines have faced grounding due to engine failures and powder metal contamination. As of March 31, 2025, around 133 aircraft — representing 15-17 per cent of the total industry fleet, were grounded across select airlines, though this improved from 20-22 per cent in September 2023.
These groundings have led to higher lease rentals, increased wet leasing of older aircraft with lower fuel efficiency and elevated maintenance costs, pressuring margins.
In December 2025, IndiGo experienced major operational disruptions linked to stricter flight duty time limitation regulations, adverse weather and technical challenges. On December 5 alone, around 1,600 flights were cancelled, representing roughly 70 per cent of its daily operations at the peak of the crisis. The aviation regulator later granted temporary relief from the new rules until February 10, 2026, after which full compliance was required. In January 2026, a penalty of Rs 22.2 crore was imposed on the airline for non-compliance with revised norms.
Icra projects the industry’s interest coverage ratio at 0.7-0.9 times for FY2026, indicating continued financial strain. While some airlines benefit from stronger parent support and adequate liquidity, others face stretched credit metrics and liquidity pressures despite a gradual improvement in recent years.
Looking ahead, Icra expects domestic passenger traffic to grow 6-8 per cent in FY2027, though on a lower base, translating into 175-182 million passengers, below earlier projections. |
