The domestic aviation sector faces a much tougher FY27, with projected industry losses nearly tripling to ₹36,000-38,000 crore from earlier estimates and passenger growth forecasts being cut as the West Asia conflict, elevated fuel prices and a weakening rupee squeeze airline finances.
The latest aviation outlook report by ICRA, released on Friday, has sharply revised its FY27 net loss estimate for the industry to ₹36,000-38,000 crore from its earlier projection of ₹11,000-12,000 crore. It has also revised its FY26 loss estimate upwards to ₹32,000-34,000 crore from ₹17,000-18,000 crore estimated earlier, reflecting the impact of the prolonged geopolitical conflict, higher aviation turbine fuel (ATF) prices, rupee depreciation and rising aircraft lease rentals.
Despite a rebound in passenger traffic during May, ICRA has lowered its domestic passenger traffic growth forecast for FY27 to 3-6% from the 6-8% projected earlier. It has also slashed its international passenger traffic growth estimate for Indian carriers to 0-3% from 8-10%, citing higher fares driven by rising airline costs, airspace disruptions, flight cancellations and an expected moderation in discretionary travel demand.
Traffic Rebound
Domestic air passenger traffic rose 11.3% year-on-year to 15.64 million in May 2026 from 14.05 million a year earlier. Traffic was also 13.2% higher than the 13.81 million passengers recorded in April.
However, ICRA attributed the sharp growth largely to a favourable base, as travel demand had weakened in May 2025 following the Pahalgam terror attack and the subsequent military conflict between India and Pakistan. Domestic passenger traffic during April-May FY27 stood at 29.46 million, up 3.8% year-on-year.
The ratings agency retained its negative outlook on the aviation sector, saying airline profitability will remain under pressure as elevated fuel prices, depreciation of the rupee against the US dollar and higher aircraft lease rentals are unlikely to be fully offset through fare hikes. It noted that the escalation of the West Asia conflict since late February has materially worsened the industry’s earnings outlook.
Airline capacity also improved during May, with domestic carriers operating around 103,515 departures, up 5.1% year-on-year and 6.6% sequentially. Passenger load factor (PLF) remained robust at an estimated 88.8%, compared with 83.9% in May 2025 and 82.0% in April 2026, indicating airlines continued to fill a high proportion of available seats despite mounting cost pressures.
Fuel Woes
Fuel continues to be one of the biggest challenges for airlines. Domestic ATF prices in June remained unchanged from April and May following pricing interventions by oil marketing companies, but were still 26.9% higher than a year earlier. For international operations, ATF prices declined around 27% sequentially but remained about 45% above year-ago levels. Fuel accounts for 30-40% of airline operating costs, while 35-50% of total expenses—including fuel, aircraft lease rentals and maintenance—are denominated in US dollars, leaving airlines exposed to currency volatility.
The report highlighted several government measures aimed at easing financial stress on airlines, including the 25% reduction in landing and parking charges, the ₹5,000-crore Emergency Credit Line Guarantee Scheme (ECLGS 5.0), under which SpiceJet has already drawn part of its eligible funding, and the newly approved ₹10,000-crore ATF Price Stabilisation Fund. According to ICRA, the stabilisation fund is expected to reduce fuel price volatility, improve cost visibility for airlines and help moderate fare fluctuations, although airlines opting into the mechanism may not fully benefit if global fuel prices continue to soften.
The agency also said supply-chain disruptions and Pratt & Whitney engine issues continue to constrain industry capacity, with around 99 aircraft remaining grounded as of March 2026, accounting for 11-13% of the industry’s fleet, although this has improved from 20-22% in September 2023.