Airlines To Face Fresh Turbulence As Passenger Growth Slows, Costs Rise: Ratings Agency

India's aviation sector is bracing for a challenging year ahead, with credit rating agency ICRA (Investment Information and Credit Rating Agency) projecting the industry's net losses at Rs 9,500-10,500 crore in the current financial year. This would be almost double the Rs 5,500-crore loss estimated for the fiscal ended March 2025, reflecting slowing traffic growth and rising cost pressures, despite a recovery from the pandemic lows.

The warning comes at a time when Indian carriers are dealing with a mix of geopolitical tensions, supply chain disruptions, higher fuel costs, and weakened passenger sentiment following recent safety incidents.

Traffic Growth Set to Slow

According to ICRA, passenger growth is expected to lose steam despite a strong traffic recovery in the past two years. Domestic air travel, which rose 7.6 per cent in FY2025 to 16.5 crore passengers, is now projected to grow by only 4 to 6 per cent in FY2026, taking volumes to 17.2-17.6 crore flyers.

International travel, which grew 14.1 per cent in FY2025, is likely to expand 13 to 15 per cent this year, lower than earlier estimates of 15-20 per cent. ICRA noted that prolonged monsoons, fresh trade headwinds such as US tariffs, and the fallout of the Air India crash in June are weighing on consumer and business confidence.

The slowdown is already visible in recent data. In July 2025, domestic passenger numbers fell 1.1 per cent year-on-year to 1.28 crore travellers and dropped 5.6 per cent sequentially compared to June. Airlines also flew fewer services, with capacity down 3 per cent year-on-year and 6.5 per cent month-on-month. For April-July 2025, however, domestic traffic still showed a modest 3.1 per cent growth, touching 5.48 crore passengers.

Despite the decline in traffic, airlines managed fuller flights. The industry's Passenger Load Factor (PLF) improved to 86.7 per cent in July 2025, compared to 85 per cent a year ago.

Rising Costs, Supply Chain Issues

Aviation Turbine Fuel (ATF) continues to be the biggest cost headwind. Fuel prices in August 2025 were up 3 per cent from July, although they remained nearly 6 per cent lower year-on-year. On average, ATF accounted for 30 to 40 per cent of airlines' operating costs in FY2025. 

With most fuel, leasing, and maintenance costs linked to the dollar, the rupee's weakness against the currency has further eroded cost control. While airlines have attempted to pass on higher input costs through fare hikes, ICRA cautioned that profitability will depend on their ability to sustain pricing power.

The sector is also still grappling with engine-related issues. As of March 2025, around 133 aircraft - or nearly 15 to 17 per cent of the total fleet - were grounded due to supply-chain challenges and Pratt & Whitney engine problems. IndiGo, which had nearly 70 aircraft grounded in FY2025, has managed to reduce the number to about 40, but industry-wide constraints remain.

The grounded fleet has forced airlines to lease additional aircraft, often at higher rental costs, including older models with lower fuel efficiency. This has pushed up costs even further. Airlines have also faced crew shortages in recent months, leading to delays and cancellations.

The sector is also dealing with a dent in consumer confidence following the Boeing 787 Dreamliner plane crash that has led to delivery delays from the manufacturer, prompting Air India to cut 15 per cent of its international wide-body capacity temporarily.

Industry Outlook: Stable, But With Risks

While losses are widening, ICRA maintained a "stable" outlook for the industry, pointing out that the projected losses are far below the pandemic-era levels, when the industry bled over Rs 2 lakh crore across FY2022 and FY2023.

ICRA expects the industry's interest coverage ratio to be between 1.5 to 1.7 times in FY2026, indicating some resilience thanks to higher passenger load factors, healthy yields, and partial compensation from engine manufacturers.

Yet, the challenges are mounting. "Passenger traffic growth is slowing even as new aircraft are being inducted. Rising costs, supply-side challenges and demand uncertainty are expected to weigh on profitability," ICRA said in its note.