ICRA Revises Aviation Outlook To Negative Amid Cost Pressures, Demand Risks

(MENAFN- KNN India) ** New Delhi, Mar 27 (KNN)** Research and rating firm ICRA has revised its outlook on the Indian aviation industry to Negative from Stable, citing rising geopolitical tensions in West Asia, currency depreciation, and increasing fuel costs.

The prevailing adverse operating environment is expected to strain airline profitability and moderate demand growth.

The rating agency noted that disruptions in international airspace availability since late February 2026 have led to flight rerouting, higher fuel consumption, and increased operating costs.

These pressures are being compounded by the weakening of the Indian rupee against the US dollar and a sharp rise in aviation turbine fuel (ATF) prices.

** Demand Growth Likely to Remain Subdued**

ICRA has projected domestic passenger traffic growth at just 0-3 percent for FY2026, while international traffic for Indian carriers is expected to grow at 7-9 percent.

However, earlier projections for FY2027, domestic growth of 6-8 percent and international growth of 8-10 percent, now carry a downward bias due to emerging uncertainties.

Higher airfares, driven by fuel surcharges estimated at 5-6 percent of ticket prices, along with flight cancellations due to airspace closures, are expected to dampen demand.

Additionally, the removal of airfare caps by the Directorate General of Civil Aviation has raised concerns over potential price spikes, further weighing on passenger traffic.

** Profitability Under Pressure**

The industry is expected to report net losses of Rs 170–180 billion in FY2026. Earlier estimates had suggested a narrowing of losses to Rs 110–120 billion by FY2027, but these projections are now under pressure due to rising fuel costs and adverse currency movements.

Fuel expenses, which account for 30-40 percent of airline operating costs, remain a key concern. Additionally, 35-50 percent of total costs, including aircraft leases and maintenance, are dollar-denominated, making airlines particularly vulnerable to currency depreciation.

** Operational Constraints Persist**

Operational challenges continue to impact capacity. Around 117 aircraft, or 13-15 percent of the industry’s fleet, remained grounded as of February 2026 due to supply chain disruptions and engine-related issues, although this marks an improvement from earlier levels.

Domestic passenger traffic stood at 142.5 lakh in February 2026, registering a modest 1.5 percent year-on-year growth but declining 6.5 percent sequentially. For the April–February period of FY2026, domestic traffic grew by 1.6 percent to 1,532.4 lakh.

On the international front, Indian carriers recorded passenger traffic of 34.0 lakh in January 2026, up 6.4 percent year-on-year. For the first ten months of FY2026, international traffic grew by 8.5 percent to 303 lakh.

Despite these constraints, passenger load factors remained strong at 93 percent in February 2026, indicating relatively healthy demand compared to available capacity.

** Fuel Prices and Financial Stress Add to Concerns**

ATF prices rose 5.7 percent sequentially as of March 1, 2026, while global crude prices surged sharply, with Brent crude oil reaching around USD 105 per barrel from USD 72 before the conflict escalation.

The sector is also facing financial stress, with weakening liquidity among some airlines. Interest coverage is expected to decline to 0.7-0.9 times in FY2026 from 1.8 times in FY2025, before a possible recovery in FY2027, subject to geopolitical stability.

ICRA said the aviation sector is likely to face a challenging near-term environment, with earnings under pressure from elevated fuel costs, currency volatility, operational disruptions, and potential softening in demand due to rising ticket prices.

** (KNN Bureau)**

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