India's bustling aviation sector, once soaring on a post-pandemic recovery path, is now encountering significant turbulence. Recent data from the Directorate General of Civil Aviation (DGCA) and various brokerage reports indicate a challenging second quarter for FY2026, primarily driven by a slowdown in domestic passenger demand, escalating fuel prices, and tighter airline capacity. Domestic passenger traffic, which accounts for nearly 80% of total air traffic, experienced a 3% year-on-year dip in July and a 1.4% decrease in August. This softening demand marks a stark contrast to the robust growth observed previously, signaling a potential slowdown in the sector's recovery trajectory and raising concerns about its profitability.
The financial pressures on Indian airlines are mounting, largely due to a dual challenge of rising operational costs. Aviation Turbine Fuel (ATF), a major expense accounting for 40% of an airline's operational costs, saw a 3% increase in October. Compounding this, the Indian Rupee's 2% depreciation against the dollar since June has further inflated dollar-denominated expenses such as aircraft leases and maintenance, which collectively represent nearly half of total airline costs. To mitigate the impact of weakening demand and sustain yields, airlines have resorted to tightening capacity by reducing Available Seat Kilometres (ASK). Despite these measures, financial institutions like Icra anticipate combined losses for Indian airlines ranging from ₹9,500–10,500 crore in FY2026, underscoring the severe profitability crunch.
Amidst these domestic headwinds, international routes are emerging as the solitary bright spot for Indian carriers. International passenger volumes for Indian airlines grew by a robust 8.6% year-on-year in Q1FY26, significantly outpacing the 4.4% growth recorded on domestic routes. This surge is attributed to healthy international tourism activity and expanded connectivity to newer global destinations. While Indian airlines are gradually increasing their share, foreign carriers still dominate international traffic. This divergence underscores a dynamic shift in travel preferences and operational resilience. The overall outlook remains cautious, with domestic market struggles largely overshadowing international gains, making the current fiscal a critical period for India's aviation sector as it navigates these complex economic currents.
