Whalesbook
Passenger traffic growth in India's aviation sector slowed to just 2% in FY26, exposing significant financial weaknesses. This downturn is more than a temporary dip; it signals increased financial strain for airlines facing external shocks and rising operational costs.
Passenger traffic growth in FY26 hit its slowest pace in years, with domestic traffic up just 1% and international routes by 3%. This is a sharp contrast to FY25, when domestic traffic rose 8% and international 14%. Factors behind the slowdown include Middle East geopolitical tensions, an Air India aircraft accident grounding planes, and operational disruptions at IndiGo. This slump puts pressure on airline finances and dims the earnings outlook.
Reduced passenger numbers and higher operating costs are creating a difficult financial situation for Indian airlines. The industry is expected to report net losses of ₹17,000-₹18,000 crore in FY26, a major jump from FY25's ₹5,500 crore loss. This deficit is driven by geopolitical issues, currency depreciation, and soaring fuel prices. Aviation Turbine Fuel (ATF) costs, making up 30-40% of expenses, are a significant burden, worsened by the rupee's fall against the dollar which increases costs for dollar-denominated expenses like aircraft leases and maintenance. This echoes the 2008-09 financial crisis when airlines also faced huge losses from fuel costs. Even IndiGo, a market leader, saw its net profit drop 78% to ₹549 crore in Q3 FY26, despite revenue growth, showing widespread pressure. Air India's losses are projected to nearly double in FY26, possibly over ₹20,000 crore, indicating ongoing operational issues, a challenge persisting nearly four years after its acquisition.
The industry's financial health is worsening, shown by its interest coverage ratio expected to drop to 0.7-0.9 times in FY26 from 1.8 times in FY25. This indicates higher financial distress. SpiceJet faces significant operational challenges and a shrinking market share, along with considerable debt. Reliance on international routes, which are key transit hubs, adds risk, especially with Middle Eastern airspace disruptions. The sector remains vulnerable to currency drops and volatile fuel prices, which significantly impact expenses and profits.
For FY27, industry recovery depends on easing geopolitical disruptions, particularly in the Middle East, and stabilizing fuel prices. Domestic passenger traffic is forecast to rebound to 6-8%, with net losses potentially narrowing to ₹11,000-₹12,000 crore. Challenges remain, including high fuel costs and currency volatility. The government is considering financial relief for airlines, highlighting the sector's fragile condition and the long road to profitability.