Domestic air travel growth to stabilise India’s aviation industry

India is witnessing strong aviation growth, with the sector emerging as the world’s third-largest domestic market. Driven by a growing middle class, the number of operational airports has increased from 74 in 2014 to 164 in 2025, while passenger traffic is projected to reach 665 million by FY31.

Industry losses are expected to decline by nearly one-third in 2026-27 as domestic passenger traffic growth recovers to 6–8%, according to ICRA. The rating agency estimates domestic air passenger traffic to rise to 175–179 million passengers in 2026-27.

Correspondingly, the net loss of the Indian aviation industry is projected to reduce to Rs. 110–120 billion in 2026-27 from an elevated Rs. 170–180 billion in 2025-26.

International air passenger traffic is estimated to grow by 7–9% in 2025-26 and 8–10% in 2026-27, ICRA said. The current fiscal year has seen modest domestic passenger traffic growth due to cross-border escalations, weather-related disruptions, travel hesitancy following the June 2025 aircraft accident, headwinds to business travel from elevated US tariffs, and operational disruptions at IndiGo in December 2025.

Industry losses in 2025-26 are estimated to be significantly higher than the net loss of around Rs. 55 billion in 2024-25. However, losses are expected to decline to Rs. 110–120 billion in 2026-27, supported by domestic traffic growth and normalization of operations after disruptions in 2025-26 that led to flight cancellations and passenger refunds.

The industry’s debt metrics, which weakened in 2025-26 with an estimated interest coverage of 0.7–0.9 times compared with 1.8 times in 2024-25, are also expected to improve to 1.3–1.5 times in 2026-27, despite rising debt linked to new aircraft deliveries.

Aviation turbine fuel (ATF) prices and rupee-dollar movements remain key determinants of airline profitability, with fuel accounting for 30–40% of operating expenses. Airlines have seen some relief on the ATF front, with average prices at Rs. 91,173 per KL in 11M 2025-26, about 4% lower year-on-year, though still well above pre-Covid levels of Rs. 64,715 per KL in 2019-20.

Meanwhile, the rupee depreciated by around 3.2% year-on-year in 9M 2025-26. While this level of depreciation may not be disruptive in isolation, it adds pressure on a loss-making industry, as aircraft lease payments, maintenance costs and debt servicing are highly sensitive to currency movements. Although airlines have a partial natural hedge through international operations, they continue to carry net foreign currency payables.

Industry yields declined in 9M 2025-26 due to external shocks such as cross-border tensions, the aircraft crash and operational disruptions in December 2025. However, the decline in yields was not as steep as the reduction in fuel cost per available seat kilometre (CASK), as airlines attempted to sustain pricing amid rising cost pressures. ICRA expects yields to improve in the near term as temporary disruptions ease, though ATF prices and the USD-INR rate will remain key monitorables.

The industry added around 4% capacity in CY2025, with the total fleet standing at 865 aircraft as of December 31, 2025. Pending aircraft deliveries exceed 1,700 as of January 31, 2026, to be inducted over the next decade, largely aimed at replacing older aircraft with more fuel-efficient models.

Grounded aircraft have been a persistent challenge. Engine issues and supply chain constraints had grounded 20–22% of the fleet as of September 2023. This has improved to 13–15% as of February 2026, equivalent to about 117 aircraft. As groundings decline further and new aircraft are inducted, the balance between supply and steadily rising demand is expected to move towards a more stable equilibrium.