The Federation of Indian Airlines is calling for an extension of the VAT relief on aviation fuel, which has risen to ₹137 per litre. With fuel now accounting for up to 60% of operating expenses, carriers face significant margin pressure. Investors should monitor the government's response and how potential ticket price hikes might impact passenger demand during the upcoming festive season.
The Indian aviation sector is facing a sharp rise in operational costs as Aviation Turbine Fuel (ATF) prices have climbed to approximately ₹137 per litre. The Federation of Indian Airlines (FIA) has formally urged state governments to extend the existing VAT relief on aviation fuel, noting that current concessions in several states are nearing expiration. This relief is considered a vital safety net for operators, as fuel now accounts for 55% to 60% of total operating expenses, a significant increase from the historical norm of 30% to 40%.
This spike in input costs has already prompted carriers to adjust fuel surcharges to protect profitability. However, these hikes carry the risk of slowing down passenger traffic if airfares rise too sharply, particularly as the industry approaches the high-demand festive season. The financial strain is compounded by broader macroeconomic pressures, such as the depreciation of the rupee, which increases the cost of aircraft maintenance and lease payments.
Beyond fuel costs, the industry is grappling with infrastructure transition challenges. Adani Airport Holdings, the operator of the Chhatrapati Shivaji Maharaj International Airport in Mumbai, has outlined plans to begin redeveloping Terminal 1B in January 2027. To manage capacity during this construction phase, the operator has proposed a partial shift of flight operations to the new Navi Mumbai International Airport. While the airport authority has offered incentives, such as a 100% waiver on landing charges for new international flights, many airlines have expressed resistance to the move.
Experts warn that a premature or forced shift of services could lead to operational inefficiencies. There is a concern among carriers that they might be forced to permanently relinquish valuable flight slots at existing hubs during the transition. Such a move could disrupt network connectivity, specifically for passengers transferring between domestic and international flights, potentially impacting long-term scheduling consistency and revenue for major carriers.
For investors, the primary monitorables include the government’s policy decision on the requested tax relief and the outcome of negotiations between airport operators and airlines regarding the shift to Navi Mumbai. The financial impact of recent fuel surcharge hikes and whether they can successfully offset rising costs without dampening passenger demand will be critical factors in assessing the sector's performance in the coming quarters.