Whalesbook
### Aviation Sector Under Pressure
Soaring global oil prices have plunged India's aviation sector into a deep financial crisis. Beyond the immediate shock of rising fuel expenses, a more complex situation is unfolding, creating different challenges and responses across the industry. Airlines are now adjusting their strategies to survive amidst global uncertainty and changing regulations.
### Fuel Costs Skyrocket, International Routes Suffer
Aviation Turbine Fuel (ATF) prices have become the biggest cost for Indian carriers, now making up 55-60% of total operating expenses – a sharp rise from the usual 30-40%. This surge hits international operations hardest, with ATF prices jumping about ₹73 per litre in April 2026, making many long-haul routes unprofitable. Major airlines like Air India are already cutting international flights until July due to profit concerns on routes to Europe, North America, and Australia.
Domestic flights, however, see moderated price hikes partly due to government action. Domestic ATF prices stayed flat in May 2026 after a 25% cap on increases was put in place in April. This difference gives carriers like IndiGo and SpiceJet a temporary break on domestic flights but widens the profit gap. The Federation of Indian Airlines (FIA) notes this price difference complicates operations and adds to the industry's problems.
### Airlines Struggle to Pass On Costs
Airlines are trying to pass on rising costs but face major limits. IndiGo, which doesn't hedge fuel costs, is fully exposed to market swings. While it has added fuel charges, rules allow only a 25% pass-through of domestic fuel price hikes. A new ₹50 per litre excise duty on ATF also cuts into airline profits. Moody's believes IndiGo's short booking window (30-45 days) might help recover costs through higher fares over time, but profits are currently tight.
Air India has raised fares and added fuel surcharges, but these haven't fully covered losses. Analysts suggest Air India is also cutting capacity and using its own fleet more, offering more flexibility than IndiGo's leased fleet approach. The FIA has asked the government to temporarily remove the 11% excise duty on domestic ATF and rethink pricing methods to stabilize costs.
### Deeper Problems: Losses, Weak Demand, and Rupee Woes
Beyond the current fuel crisis, deeper structural weaknesses affect the industry. Air India continues to struggle with long-standing losses, expecting over ₹22,000 crore for FY2026, even after privatization. SpiceJet faces a much harder financial situation, with ongoing losses and a negative P/E ratio. ICRA has lowered its outlook for the Indian aviation industry to negative, pointing to fuel costs, global events, and a weaker rupee as major worries.
Analysts caution that consistently higher fares could reduce demand, especially among leisure travelers and budget flyers. The sector is expected to report net losses between ₹17,000–18,000 crore in FY2026, with earlier forecasts for FY2027 now likely to be revised down. The closure of Pakistani airspace and longer flight paths due to Middle East tensions increase fuel use and crew expenses. The weakening rupee also adds pressure, as many airline costs, like leases and maintenance, are paid in dollars.
### Green Fuel Future vs. Present Fuel Crisis
While facing these immediate challenges, the government has recognized Sustainable Aviation Fuel (SAF) and its blends as part of the ATF definition, moving towards a greener future. India has set target goals for blending SAF on international flights starting in 2027, in line with global decarbonization efforts. However, these long-term plans offer little immediate help to airlines struggling with high operating costs. Without requirements for domestic SAF blending, the main focus remains on managing current fossil fuel expenses. The industry's dependence on imported crude oil makes it vulnerable to global price shocks, with Brent crude prices around $109-$126 per barrel. As policy changes happen, the near-term future for Indian aviation remains closely tied to volatile energy markets and how airlines manage them.