Iran war jet fuel shock squeezes airlines, rupee slide adds to margin pressure

India's aviation industry is looking at a disruptive Q4 FY26

• The Iran war has taken a toll on the financials of airlines
• Airlines will be able to recover only a fraction of the cost through surcharges
• Rupee depreciation has added to the cost troubles

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The Iran war induced surge in jet fuel prices is rapidly eroding airline margins, forcing carriers to absorb the bulk of the spike. A weakening rupee further limits the financial headroom in an already fragile industry.

The price of aviation turbine fuel (ATF) has risen faster than that of crude, amplifying the pain for airlines whose costs are largely dollar-linked.

Within days of the war, refining margins per barrel rocketed nearly tenfold, far ahead of a 19 percent rise in Brent crude and the Platts premium. ATF prices zoomed nearly 160 percent in under a week to about $225 a barrel, according to industry officials.

Airlines impose limited surcharges

Airlines have responded with calibrated fare hikes, though executives say these offer only limited relief.

Air India has imposed a flat Rs 399 fuel surcharge on domestic routes, $20–$30 on Southeast Asia and Africa sectors and $25–$50 on long-haul routes to Europe, North America and Australia.

India’s largest carrier IndiGo followed with a distance-based surcharge, ranging from Rs 425 to Rs 2,300 per passenger. Akasa Air introduced a levy of Rs 199–Rs 1,300 per passenger.

Airlines absorb bulk of cost increase

Despite these hikes, airlines acknowledge that fare increases barely offset the surge in fuel costs. “The fuel surcharge is a very small component in the overall cost structure. On domestic routes, it covers only about 17 percent of the additional cost. The remaining 83 percent is being absorbed,” an Air India official said, warning that a full pass-through would make air travel prohibitively expensive.

Brokerage estimates underline the limited cushion. Jefferies said IndiGo’s surcharge could lift yields by just Rs 0.30–Rs 0.35 a seat against an annual base of about Rs 5.1, while Citi expects a relatively higher — but still constrained — yield impact of 8–10 percent.

Structural cost disadvantage vs Europe

Structural disadvantages in India’s aviation market are further magnifying the stress. Unlike Europe, where aviation fuel attracts minimal or zero taxes, levies in India account for 20–40 percent of ATF costs. Fuel itself makes up 30–50 percent of airline operating expenses in India, compared with 20–25 percent in Europe, leaving carriers far more exposed to price shocks.

Airlines have renewed calls for tax reforms, urging the government to convert ad valorem levies into fixed charges and to bring ATF under the GST regime, which would allow input tax credits and ease cost pressures.

Adding to the strain is currency depreciation. The Indian rupee has weakened about 7 percent in FY26, inflating expenses for airlines with significant dollar-denominated obligations. Aircraft leases, maintenance, spare parts, debt servicing and even salaries for foreign crew are largely linked to foreign currency, compounding the impact of higher fuel prices.