Turbulence ahead: Why India’s aviation recovery is losing altitude

The slowdown is most visible in the domestic segment, which accounts for nearly 80% of total air traffic. Domestic passenger traffic fell 3% year-on-year in July to 12.61 million. This was accompanied by a 0.81% overall flight cancellation rate in the month.

The decline is partly attributed to the fatal Air India crash in June, which resulted in reduced capacity and a loss of market share for the Tata Group company.

August passenger traffic stood at 12.9 million, a 1.4% decrease from the same period last year, according to DGCA data.

As per reports compiled by consultancy firm J.P. Morgan, financial services firm JM Financial and ratings agency Icra, daily domestic traffic fell around 1% year-on-year through mid-quarter, compared with a 6.5% expansion a year earlier.

Departures also dropped 4% year-on-year to 89,217, and 10% to 89,251 in July and August.

DGCA is yet to release the traffic data for September.

Icra, in a report last month, said airport passenger traffic, which combines domestic and international traffic, is expected to reach 430-440 million in FY26, up 5–7% year-on-year. “This possibly is the slowest pace of expansion since covid-19," it noted.

Airports reflect the slump

Data from GMR Airports suggests further weakness in September. Domestic passengers in Delhi fell 1% YoY to 4.2 million in the month.

For Q2FY26, domestic traffic declined 9% to 12.6 million, while for the first half of FY26, traffic was down 5.8% to 26.5 million.

GMR attributed the drop to runway upgrades at Delhi airport and airspace restrictions due to geopolitical tensions, although traffic is expected to recover with the runway reopening on 16 September 2025.

Fares up, so are costs

To sustain yields amid weaker demand, domestic airlines have reduced available seat kilometres (ASK) — effectively tightening capacity.

A J.P. Morgan analysis of 19 key domestic routes shows average round-trip fares rising in 15 routes, by mid- to high-single digits YoY during July–August, driven more by capacity control than demand strength.

IndiGo, which commands 64% of the domestic market, improved its load factors by 50–100 basis points and lifted domestic yields by 6% YoY in Q2, according to the brokerage.

J.P. Morgan in its report said, Indigo’s FY26 ASK growth guidance is at “low double digits", with the Q1 growth being at 16.5% and Q2 guidance being mid-to-high single digits.

“This implies H2 growth of 9-10% on a base of 16%. Domestic demand trends need to improve materially to support this growth. While fuel cost was a tailwind in Q1, it has moved up in Q2. Oil prices could be benign near-term but rupee depreciation could drive upside risks to costs," it said.

Indigo's ASK was 4,230 crore in Q1, while Spicejet's was at 218 crore for the quarter.

Fuel and currency headwinds

Aviation turbine fuel (ATF), which accounts for 40% of airlines' operating costs, rose 3% in October to ₹93,766.02 per kilolitre, up from a nine-month (January-September) average of ₹90,151.44.

JM Financial estimates Q2 ATF prices at ₹90,100/kL, compared with ₹85,200/kL in Q1, driven by higher crude oil. “The ATF prices came in higher on the back of higher oil prices. This higher fuel cost could result in subdued margins," it said.

Adding to cost pressures, the Indian rupee’s 2% depreciation since June has increased lease and maintenance expenses, which are dollar-denominated and account for nearly half of airlines’ total costs.

Profitability under pressure

Icra expects Indian airlines to post combined losses of ₹9,500–10,500 crore in FY26, with domestic traffic projected to grow 4–6%.

JM Financial expects a muted second-quarter for IndiGo, despite modest yield gains. “Indigo’s profitability is expected to remain muted in Q2 given higher ATF prices, weak rupee, and a seasonally subdued quarter," the report said. “We expect PAX yield to increase marginally, while PLF has witnessed some uptrend YoY in July-August."

In Q1FY26, IndiGo reported a net profit of ₹2,176.3 crore, down 20.2% from the year-ago quarter, while its revenue from operations rose 4.7% to ₹20,496.3 crore. The airline is yet to announce the dates for Q2.

Brokerage firm Nuvama Institutional Equities, in a 29 September report on Interglobe Aviation, IndiGo’s parent company, said the Q2 scheduled flights were down 3% YoY on low demand, stemming from weakness in domestic passenger growth. It expects IndiGo to report a negative 4% growth.

“Q2 total scheduled flights growth is muted at 1% YoY (flat for IndiGo), aided by 20% YoY growth for international flights (+30% for IndiGo)," the report noted.

International routes offer relief

International traffic remains the only consistent growth area. “International traffic continues to outpace domestic traffic growth, driven by healthy international tourism activity, along with improved connectivity to newer destinations," Vinay Kumar G, sector head, corporate ratings, Icra, said.

According to brokerage firm ICICI Securities, Indian carriers’ international passenger volumes rose 8.6% year-on-year in Q1FY26, compared with 4.4% growth on domestic routes.

Foreign airlines still carry about 55% of international passengers, down from 60% pre-covid, while Indian airlines expand into newer destinations like Turkey, Ethiopia, and Georgia.

The possible resumption of direct flights between India and China could add further capacity.