Indian aviation industry under pressure: ATF prices, rupee fall and geopolitical tensions weigh on airlines' profitability

Air India Express flight

• ATF prices are expected to rise further due to the Iran war
• Depreciated rupee has affecting maintenance, spare parts cost
• Foreign crew has to be paid in currency other than the Indian rupee
• The Iran war has led to a cutback in international flights

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The Indian aviation industry continues to navigate significant turbulence as aviation turbine fuel (ATF) prices, rupee-dollar movement, grounded aircraft and geopolitical tensions in the Middle East collectively strain airline profitability.

While fuel price had previously added a bit of relief, a recent spike, currency depreciation and international flight disruptions are adding fresh challenges to an already cost-sensitive sector.

ATF Prices Remain Elevated

Fuel remains the single largest cost component for airlines, accounting for 30–40 percent of total operating expenses. In the 11 months ended February, average ATF prices stood at Rs 91,173 per kiloliter (KL), marking a 4 percent year-on-year decline. The ATF for March 2026 stood at Rs 96,638 per KL, up 6 percent over February.

ATF prices remain significantly higher than the pre-Covid level of Rs 64,715 per KL recorded in FY20, indicating that the cost environment continues to be structurally elevated. With crude oil prices vulnerable to geopolitical shocks, particularly amid Middle East tensions, fuel cost volatility remains a key profitability risk for airlines.

Rupee Depreciation Adds to Cost Pressures

The Indian rupee depreciated by nearly 9 percent in FY26, increasing the financial burden on airlines with substantial foreign currency obligations. While such depreciation may not be materially disruptive in isolation, it adds pressure to a loss-making industry where margins are already thin.

A large portion of airline expenses is dollar-denominated, including aircraft lease payments, aircraft and engine maintenance costs, spare parts procurement and debt servicing.

Salaries of foreign crew members are also linked to foreign currency.

Cancellations and Oil Price Risks

Although Indian carriers earn foreign exchange through international operations, the current squeeze on flights to international destinations due to the Iran war and continued closure of Pakistani airspace has impacted their financials.

According to a report by Emkay Global, these developments have led to rerouting flights thereby increasing travel time and fuel consumption. Any spike in crude oil prices amid geopolitical turmoil would further raise fuel costs, weighing on airline profitability, although carriers are likely to partially pass on the increase to passengers, stated Emkay report.

Beyond direct revenue losses from cancellations, rerouting also leads to higher fuel burn, increased crew expenses and operational inefficiencies. However, intense competition in the domestic market may restrict airlines’ ability to fully pass on higher costs through fare hikes.

Middle East Conflict Creates Near-Term Headwinds

Geopolitical tensions in the Middle East have emerged as a fresh risk factor for Indian airlines, affecting international routes and capacity deployment. A report by HSBC noted that Indian carriers could face near-term pressure due to flight cancellations and airspace restrictions.

As much as 20 percent of capacity at IndiGo, around 32 percent at SpiceJet and over 40 percent at Air India could be affected. Indian airlines have already been forced to cancel flights to certain destinations in the region and parts of Europe, disrupting international operations and impacting revenues, HSBC said.

Grounded Aircraft Situation Improving

Fleet grounding has been a major concern for the sector over the past few years due to engine failures and global supply chain disruptions. According to ICRA, the situation is gradually improving. Kinjal Shah, Senior Vice President and Co-Group Head at ICRA, stated that engine failures and supply chain challenges had resulted in grounding of 20–22 percent of the total industry fleet as of September 2023.

This has since declined to 13–15 percent as of February 2026, corresponding to 117 aircraft. As the number of grounded aircraft reduces further and fresh supply is inducted, the balance between supply and the steadily rising demand from domestic and international travellers is expected to move toward a more stable equilibrium.