India's Aviation Turbulence: How Fuel Spike and Weak Rupee Threaten Airlines

The report, India Aviation Insights, notes that while domestic traffic has begun to improve after a weak second quarter, key cost variables, aviation turbine fuel and forex, pose significant challenges going forward. The study tracks high-frequency airfare and traffic data across major domestic and international routes.

According to the findings, domestic airfares for Q3 FY26 to date remain largely flat year-on-year, despite a sequential uptick on some routes. Airfares declined across nine of 19 major domestic routes, indicating that pricing power remains limited even during the seasonal travel period. In contrast, international fares have risen sharply, with the report estimating 13 per cent (YoY) growth across 14 key routes, driven by sustained demand and capacity shifts.

The report highlights that domestic air traffic recorded a 4 per cent (YoY) rise in Q3 FY26 so far, rebounding from a 2.4 per cent contraction in the previous quarter. IndiGo, the country's largest airline, strengthened its dominant position with a 65.6 per cent domestic market share in October.

On the international front, passenger volumes continue to outpace domestic growth, trending at 8 per cent (YoY) in the ongoing quarter, supported by strong outbound travel demand.

However, the improving demand outlook may not translate into earnings gains. The report warns that low single-digit yield growth may not be sufficient to offset rising fuel and currency-related expenses. Jet fuel prices in India have surged 6 per cent quarter-on-quarter, while the rupee has depreciated around 2 per cent, directly impacting both fuel and non-fuel cost lines.

Sensitivity estimates in the report show that a 1 per cent increase in fuel costs erodes profit before tax by 3 per cent, and a 1 per cent rupee depreciation cuts profit before tax (PBT) by 5-6 per cent. This indicates a "material vulnerability" for airlines if current macro trends persist.

Although international expansion could support overall available seat kilometres (ASKs), the report cautions that the increasing share of long-haul routes may exert downward pressure on yields.

The study concludes that, despite a stabilising demand environment, the sector's near-term outlook remains clouded by cost inflation and currency challenges, which could constrain profitability even as airlines push to scale capacity.

- ANI