Indian Airlines Face Profit Crunch Amid Fuel and Forex Headwinds
The Indian aviation sector is bracing for a challenging fiscal year as a combination of volatile fuel prices, currency depreciation, and geopolitical tensions threatens to squeeze margins. A recent report by Crisil suggests that domestic carriers may see their operating profits decline significantly due to these mounting macroeconomic pressures.
Expected Decline in Operating Profits
According to a report released by rating agency Crisil, the combined operating profits of domestic airlines are projected to fall by 10% to 15% this fiscal year. The agency estimates that total operating profits could drop to between Rs 16,000 crore and Rs 17,000 crore, compared to the approximately Rs 19,000 crore recorded in the previous financial year. This downward trend is driven by a "triple whammy" of elevated Aviation Turbine Fuel (ATF) costs, airspace restrictions caused by Middle East conflicts, and the weakening of the Indian rupee.
The Dominance of ATF Costs and Geopolitical Risks
Fuel remains the single most significant variable in an airline's cost structure. Under normal operating conditions, jet fuel typically accounts for about 40% of an airline's operating expenses; however, during periods of extreme volatility, this figure can surge to nearly 60%.
The ongoing conflict in the Middle East has pushed global ATF prices more than 50% above pre-conflict levels. While prices have moderated from a peak of around $145 per barrel in early June to below $125 currently, they remain substantially higher than the previous fiscal year's average of $90 per barrel. Manish Gupta, deputy chief ratings officer at Crisil Ratings, noted that even with expected moderation, fuel costs will remain elevated compared to last year.
Currency Depreciation and Rising Lease Rentals
Beyond fuel, Indian carriers are facing intense pressure from foreign exchange volatility. Since a vast majority of airline expenses—including aircraft maintenance, fuel procurement, and lease payments—are settled in foreign currencies, the depreciation of the rupee has significantly inflated operating costs.
Furthermore, as airlines aggressively expand their fleets to meet growing demand, lease rental expenses are expected to climb by approximately 15%, reaching an estimated Rs 27,000-28,000 crore this fiscal. This rise in fixed costs, paired with moderating profits, may weaken the ability of airlines to service their leases through internal accruals alone.
Global Context and Resilient Demand
The struggles of Indian carriers mirror a broader global trend. The International Air Transport Association (IATA) has also lowered its global airline profit forecasts for 2026, citing similar disruptions in the Gulf region and rising jet fuel costs. Despite these financial hurdles, a silver lining exists: passenger demand remains remarkably resilient. While higher costs and capacity constraints are likely to keep airfares elevated, strong traffic growth provides a foundation for continued operations despite the margin squeeze.
Key Takeaways
- Profit Contraction: Domestic airline operating profits are expected to drop by 10-15%, falling to a projected Rs 16,000-17,000 crore this fiscal.
- Cost Drivers: Elevated ATF prices (accounting for up to 60% of expenses during volatility) and rising lease rentals (expected to hit Rs 27,000-28,000 crore) are the primary margin killers.
- Forex Impact: Rupee depreciation is exacerbating costs, as major expenses like maintenance and fuel are paid in foreign currencies.